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.
- Gaynor, Martin. 2006. “Competition and Quality in Health Care Markets.” Foundations and Trends in Microeconomics, 2(6): 441-508.
- 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.
- 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.
- Bloom, Nicolas, Propper, Carol, Seiler, Stephan and Van Reenen, John. 2010. The impact of competition on management quality: evidence from public hospitals. NBER w16032.