On the benefits of competition in healthcare

Carol Propper

Governments faced with rising costs and growing demand are constantly searching for methods of delivering higher productivity in healthcare, or put more simply, ways of getting higher quality without increasing expenditure. The Health and Social Care Bill currently being voted on in the House of Lords has placed considerable weight on the encouragement of choice and competition.  Critics of the Bill are vociferous in arguing that a focus on choice and competition is, at best, misguided and, at worst, will lead to the whole-scale privatisation of the NHS.

In fact, a cool look at both the evidence gives a more positive picture.

First, there is the evidence from the ‘Choose and Book’ reforms of the last Labour administration. Implemented in 2006, these mandated that patients be allowed to choice from up to 5 hospitals for their treatment, and so introduced competition between healthcare providers. The evidence from these reforms broadly suggests the following.

It is clear that not all patients were offered choice, wanted it or took it up when offered. But it also appears that by 2009 around half of patients recalled being offered a choice. Hospitals rated as better – both in terms of some measures of clinical quality and in terms of having lower waiting times – before the policy reform attracted more patients and patient from further away after the reform. This suggests that the choice agenda had some effect on the selection of hospitals. More patients chose – with the help of their GPs – to go to better hospitals. Fears that patients would only choose on the basis of car parking or factors unrelated to clinical quality also appear to be ungrounded.

Did this movement of patients have any effect on outcomes? There is no systematic evidence that the choice agenda harmed patients. A study of equity post reform did not find that patients from more deprived local areas feared worse.  And recent studies have found positive news. Hospitals located in areas where patients had more choice had greater improvements in clinical quality (measured by lower death rates following admissions) and greater reductions in lengths of stay post policy than hospitals located in less competitive areas. What’s more, the hospitals in competitive markets increased their quality without increasing total operating costs or shedding staff. While reductions in death rates are a pretty crude indicator of quality and are contested, they are also used by health care regulators in many countries as a measure of hospital performance.

Second, there is evidence from the wave of mergers that the Blair administration undertook when it first came to power. Around half the acute hospitals in England were involved in a merger between 1997 and 2003. A recent study of these mergers has shown that, just as in the private sector, most of these did not realise the gains that were promised before the merger.  As mergers tend to reduce the potential for competition in a local market, these findings too suggests that there are benefits from competition in an NHS type system.

Third, findings from a recent study of management in the NHS shows that better management is associated with better outcomes in NHS hospitals and that management tends to be better where hospitals compete with each other.

Finally, from elsewhere in Europe there is also evidence which broadly supports competition. The Netherlands has had a mixed system of provision for many years and has slowly introduced competition. There is no evidence that this has massively harmed equity and is thought to have led to improvements in service delivery. In Germany and Switzerland, where providers are both public and private, the government has sought to increase competition between them.

In sum, the arguments may be more nuanced than many politicians (and perhaps health commentators) would like.  But there is no evidence from recent studies of the UK that allowing patients more choice and exposing poorly performing hospitals to the threat of their patients choosing another provider is going to lead to the whole-scale destruction of the NHS and large equity issues. On the contrary, the evidence we have to suggests that it has the power to improve outcomes for patients.

For further reading

Martin Gaynor, Mauro Laudicella and Carol Propper Can governments do it better? Merger mania and hospital outcomes in the English NHS University of Bristol CMPO working paper 12/281. http://www.bristol.ac.uk/cmpo/publications/papers/2012/wp281.pdf

Nicholas Bloom, Carol Propper, Stephan Seiler and John van Reenan

The Impact of Competition on Management Quality: Evidence from Public Hospitals University of Bristol CMPO working paper 12/281; also NBER Working Paper Series number 16032 (May 2010) http://www.bristol.ac.uk/cmpo/publications/papers/2010/wp237.pdf

Martin Gaynor, Rodrigo Moreno-Serra and Carol Propper Death by Market Power. Reform, Competition and Patient Outcomes in the National Health Service University of Bristol CMPO working paper 12/242.  Also published as NBER Working Paper number 16164 (July 2010) http://www.bristol.ac.uk/cmpo/publications/papers/2010/wp242.pdf

Nicholas Mays, Anna Dixon, Lorelei Jones (2011). Understanding New Labour’s market reforms of the English NHS Sept 2011. London: Kings Fund

To Profit, or not for profit?

Michael Sanders

As part of David Cameron’s commitment to building a “Big Society”, as well as to engaging in some of the most sweeping cuts to public spending in living memory, there has naturally been discussion about the outsourcing of public services to private-sector organisations.

At one end of this debate is a discussion about whether any non-governmental organisation should be involved in the delivery of vital public services. At the other, perhaps more reasonable end of the debate, is a discussion about what kind of organisations should step in to fill the gap left by the state’s withdrawal from service provision – in particular, whether these organisations should be allowed to make a profit.

In education, Michael Gove, the secretary of state, is quoted in this week’s economist[1] as saying “We don’t need the profit motive”, in what may well be regarded by some as a statement of political convenience more than firmly-held belief. Nick Seddon, from Reform, a think-tank, has said “It’s a fallacy to think you can choke off the profit motive without losing momentum and innovation”.

The evidence is somewhat less certain that Mr Seddon makes out. Two large areas of spending where the government stands accused either of outsourcing to private firms or conspiring to are Education and Health, where great weight is put on the tendency of the best practitioners to “go the extra mile”, be that in the form of higher quality pastoral care or extra tuition in schools, or unpaid overtime and a superior bedside manner in hospitals. In both cases, the provision of the extra-mile of care is time consuming and often uncompensated. Evidence from researchers at the CMPO (Gregg et al (2008))[2] , suggests that in non-profit “caring” environments, workers provide on average 75 minutes extra unpaid overtime a week than do their colleagues in for-profit caring firms.

Sloan (2000)[3], in his comprehensive review of ownership forms for hospitals in the United States, found that for-profit and not-for-profit hospitals were more alike than different across a number of dimensions. Importantly for the claim that ‘innovation’ would disappear along with the profit motive, he finds (although evidence is relatively sparse), that the rate at which hospitals adopt new technologies is influenced by the extent to which they are competing with other hospitals for patients, but not by their ownership type (for profit vs. not for profit).

If it is not obvious that not-for-profit hospitals or schools would perform worse (or indeed, differently), than profit-making counterparts, this may be driven by the similarities between the people running them. Glaeser and Schleifer (2001)[4] model the utility functions for individuals forming not-for-profit firms as the same as individuals starting for-profit companies. As not-for-profits are more trusted (as the response to the government’s plans would seem to suggest), a utility maximising agent may find it preferable to run a not-for-profit “free-school” or academy, and to extract their utility in the form of perks; more control over the curriculum and timetable than in a standard school, and more “Warm Glow” from having contributed something to society. In a hospital context, this resembles the possibility of “cartels” of doctors running (not-for-profit) hospitals efficiently so as to maximise their own utility, as suggested by Sloan.

In summary, the potential hazards of not-for-profit ownership of public services, when compared with for-profit ownership, may be overstated. This appears to be a confusion of the ‘profit motive’ for an ‘efficiency motive’ – there is evidence suggesting that the latter may be achieved without the former, and that not-for-profits have a lower incentive to sacrifice non-contractible quality for more profit. Perhaps, on this occasion, Mr Gove is correct.

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[1] http://www.economist.com/node/18713451 (Paywall)

[2] Gregg, Grout, Ratcliffe, Smith and Windmeijer (2008) “How important is pro-social motivation in the delivery of public services” CMPO working paper

[3] Sloan (2000) “Not-for-profit ownership and hospital performance”  Handbook of health economics, vol 1 pp1141-1174

[4] Glaeser & Schleifer (2001) “Not-for-profit entrepreneurs” Journal of Public Economics Vol 81 Issue 1 pp99-115

Price competition to be (re)introduced in the NHS

Carol Propper

 

The Government has announced is to permit hospitals to compete on price. This dramatic shift towards a more commercial market in the NHS is announced in a single paragraph in the NHS Operating Framework for 2011-12 published last week.  Paragraph 5.43 says: “One new flexibility being introduced in 2011-12 is the opportunity for providers to offer services to commissioners at less than the published mandatory tariff price, where both commissioner and provider agree.”  It adds: “Commissioners will want to be sure that there is no detrimental impact on quality, choice or competition as a result of any such agreement.”

This problem with this innocuous sounding paragraph is that we have been here before and it doesn’t work.  The reason is that in health care, prices are easy to observe, whilst quality is not.  In these circumstances, health care commissioners and sellers, despite the hopes of the Operating Framework, end up focusing on price, raising the prospect of two-for-one deals on surgery and cut-rate consultations for certain specialties. At the same time, in order to provide services at these prices, quality suffers.

Research from CMPO showed this is precisely what happened in the internal market of the 1990s, where price competition was allowed.  Hospitals facing more competition focused on bringing down costs and lowering waiting list in order to provide what their commissioners wanted. But this was at the expense of quality and the consequence was that patients in hospitals located in competitive markets were more likely to die after an admission following a heart attack. These kind of unforeseen consequences are ikely to happen again – especially now when budgets are tight.

In making this move, Andrew Lansley is ignoring all the evidence on the impact of price competition in the hospital sector and is potentially endangering patients lives.

 

 

Healthcare competition saves lives

Carol Propper

Governments faced with rising costs and growing demand are constantly searching for methods of delivering higher productivity in health care, or put more simply, ways of getting higher quality without increasing expenditure. One currently favoured mechanism is to encourage competition between the suppliers of care. But will this work? The appeal is simple – competition works in the rest of the economy therefore it should work in health care.

Unfortunately for politicians, the simple appeal does not necessarily translate across sectors of the economy.  There is, in fact, no strong theoretical support for competition in healthcare leading to better outcomes:  the predictions of economic theory on this issue are quite ambiguous (1). However, under certain condition, theory models do support competition: this is when prices are fixed by government and hospitals compete in terms of quality.

Testing this theory is often difficult, because competition in health care markets is endogenous to quality. The presence of a high quality hospital may mean that competitors stay out of its market. Or hospitals which are cutting edge tend to be located in urban areas and also attract sicker patients. In both of these situations it will appear that competition is associated with lower quality.  Dealing with this statistically is not easy without some kind of natural experiment, as case mix is very difficult to measure precisely.

The English National Health Service (NHS) is subject to frequent policy change as politicians use health care as part of their drive to win supporters. The last Labour administration introduced competition between health care providers as part of its drive to increase productivity in health care. In 2006 the government mandated that all patients must be offered the choice of five, and by 2008 any, hospital in the NHS for their treatment. In addition, the prices that hospitals could charge were fixed by the government in a ‘yardstick competition’ type regime.

This policy change provided a natural experiment that researchers could exploit. Hospitals compete in geographical markets because patients prefer to be treated, inter alia, closer to home. Hospitals thus vary in the extent to which they face competitive forces simply because of geography.  Exploiting this fact allowed researchers to look at outcomes pre- and post- the competition policy across different markets.

The research looked at all admissions to hospitals in the NHS – around 13 million admissions – pre- and post-policy.  It found that hospitals located in areas where patients have had more choice since the NHS reforms had higher clinical quality – as measured by lower death rates following admissions – and shorter lengths of stay than hospitals located in less competitive areas.  What’s more, the hospitals in competitive markets did this without increasing total operating costs or shedding staff.  These findings suggest that the policy of choice and competition in health care can have benefits – quality in English hospitals in areas in which more competition is possible has risen without a commensurate increase in costs (2).

One reason that the policy may be having this impact is the fact that prices are externally fixed. Research for the UK showed that when competition was introduced in the early 1990s in a regime that allowed hospitals to negotiate prices as well as quality there was a fall in clinical quality in more competitive areas. Waiting lists, however, declined for these hospitals.  This is supported by economic intuition.  Where quality is hard to observe, the elasticity of demand will be low. Waiting lists on the other hand are easy to observe. Buyers of health care will therefore have a greater elasticity of demand with respect to the latter than the former and so suppliers will tend to compete on the latter and on price, whilst shaving the less well observed clinical aspects of quality (3).

These results suggest that the details of the policy matter. Competition under fixed prices appears to have beneficial results whilst competition where hospitals bargain over price and quality do not.  This in turn has policy implications for governments who are keen on market forces in health care.  If competition is to work, price regulation has to be retained.  A free-for-all in prices would mean a return to the “internal market” of the 1990s, a regime in which hospitals competed vigorously on waiting times and ignored aspects of quality that are more difficult to measure. In addition, the tendency of the UK government to merge failing hospitals needs to be looked at carefully. Mergers are popular with finance ministries in NHS type systems because they remove what is often seen as ‘excess capacity’. However, while there are gains from removing poor managers when a hospital fails (4), removing capacity by merger will limit the extent of competition and may stifle the impetus given by competitive forces to improve outcomes for patients.

References

1. Gaynor, Martin. 2006. “Competition and Quality in Health Care Markets.” Foundations and Trends in Microeconomics, 2(6): 441-508.
2. Gaynor, Martin, Moreno-Serra, Rodrigo and Propper, Carol. 2010. Death by Market Power: Reform, Competition and Patient Outcomes in the National Health Service. NBER w16164.
3. Propper, Carol, Simon Burgess, and Denise Gossage. 2008. “Competition and Quality: Evidence from the NHS Internal Market 1991-9.” The Economic Journal, 118(525): 138-170.
4. Bloom, Nicolas, Propper, Carol, Seiler, Stephan and Van Reenen, John. 2010. The impact of competition on management quality: evidence from public hospitals. NBER w16032.