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On the benefits of competition in healthcare

February 27, 2012 3 comments

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

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The Health Bill, the NHS and the facts

January 20, 2011 10 comments

Carol Propper

 

I have to admit to being stunned by the level of misinformation that is currently accompanying the Health and Social Care bill as it is introduced into Parliament.  On Jan 19th alone, the shadow health secretary John Healey stated that “the changes would make the health service profit centered rather than patient centered”, the health secretary Andrew Lansley said “competition would be on quality and not cost” and that as the health service is free at the point of delivery patients obtain the best medical outcome rather than the cheapest option, while Karen Jennings, head of health at Unison, stated that the only survivors will be the private health companies which are “circling like sharks” and MPs say “the reforms have taken the NHS by surprise”.

None of these statements has much basis in either fact or evidence. The reforms being introduced in the bill are essentially a continuation of the reforms started under the previous administration, albeit at an increase in pace and scale. The Labour reforms introduced competition between hospitals for patients and patient choice of hospital and a system of regulated prices. Lansley has changed the buyers of health care from local PCTs to General Practitioners, but under Labour the PCTs were supposed to act on behalf of their local GPs anyhow.  Why Healey believes that increasing the pace of reform and replacing the PCTs with GP consortia should mean the NHS switches from being patient to profit centered is completely unclear.  GPs have not been seen by politicians as profit centered previously. In fact, perhaps because GPs see so many voters each week, most politicians studiously ignore the fact that GPs are private contractors and not NHS employees. In addition, the new GP consortia will probably employ a fair number of ex-PCT staff. So it seems unlikely there will be a radical shift in values on the purchaser side.

On the other hand, the current secretary of state is also being somewhat disingenuous in his statement that because the NHS is free at point of delivery, competition will be in terms of quality. He rather forgot to mention one key change he has made, which is to abolish the fixed price tariff introduced by the previous administration, The fixed price tariff was introduced on the basis of evidence from the UK (as well as elsewhere) that competition in health care with fixed prices avoids a potential race to the bottom in which sellers of care compete to attract patients on the basis of lowest cost at the expense of quality In his desire to push forward his competitive model, Lansley has thrown away the fixed price tariff and does indeed risk such a race to the bottom. The fact that care will be free to the patients is irrelevant, as the gains from price savings will accrue not to individual patients but to GP consortia that face the pressures arising from fixed budgets and a tight financial settlement. Exactly the same model was employed in the NHS in the internal market of the 1990s and in that market, cash constrained buyers focused on price and reducing waiting lists, at the expense of quality.

Karen Jennings’ statement appears to have even less basis in fact. Again, the plans to allow any willing provider to supply care to the NHS were actually introduced by the Labour administration. There has been relatively little entry of non-NHS providers not because these providers were not allowed to enter but because they didn’t find it profitable. There is no a priori reason why in a more constrained financial era that supplying care to the NHS should make private providers large profits. It is true that GP consortia will probably seek the help of the private sector to carry out their commissioning function but given the poor performance of some PCTs, this may simply allow an increase in talent on the purchasing side of the NHS. And given that the purchaser side has been weaker than the provider side for a long time, this is probably a good thing for patients.

Finally, the fact that MPs think that these reforms have taken the NHS by surprise seems to suggest that MPs don’t notice things until they come to the House. These reforms were trailed very soon after the Coalition government came to power and again in a White Paper this autumn. All the major components of the bill were in that White Paper and many NHS bodies have been preparing themselves for another period of rapid change. What many MPs may not like is the speed of change  – and there are good reasons to question this. For example, it is not clear that replacing PCTs with GP consortia at this stage in the reform process will help develop the gains that competition between suppliers has been shown to have had and creating a new set of purchasers will undoubtedly take a lot of attention, resources and time. In my view these resources would have been better used in developing choice to a greater degree, getting the rules of the game right and then introducing, at a later date, a large role for those GPS that want it.

 

Price competition to be (re)introduced in the NHS

January 8, 2011 Leave a comment

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.

Deregulating public sector pay

November 16, 2010 1 comment

Carol Propper

 

The Coalition government is concerned about public sector pay and has instigated a review chaired  by Will Hutton. Hutton has signalled that he will be looking at it the level of pay, both across sectors and within the public sector. However, one issue on which there have been fewer pronouncements to date is the regional variation in pay within the public sector.

Pay in the public sector for doctors, teachers, nurses, armed forces and other public sector workers is set by the Pay Review Bodies. These bodies review the state of the labour market and recommend a level of pay for to the government and the unions each year.  Public sector unions often stress fairness in their wage negotiations: the commonly articulated view is that a teacher in an inner city should in Newcastle does the same job as one in inner London and should therefore be paid the same wage.  Perhaps as a result of this argument the review bodies basically set one wage for all the workers they cover, regardless of where they are located in the country. There are extra increments for those located in the South East and London, but these tend to be small. The result is that wages in the public sector tend to be much ‘flatter’ across geographical space than private sector wages. As an example, the difference in the pay of a nurse located in the North East and London is around 15%. However, the difference for a private sector employee with similar skills to a nurse is in the order of 40%.

Such large gaps are likely to cause recruitment and retention problems for public sector employers in the South East as their workers live in a high cost area and as a result will be offered higher wages  in the private sector. Shortages of nurses and teachers in the South East have been an ongoing and well documented problem. But is is likely that these recruitment and retention problems also have a knock on effect into the productivity of public sector services in high cost areas. Shortages of workers, high turnover rates and perhaps low levels of morale as a consequence, are likely to cause production problems. CMPO research on nurses’ pay has confirmed this intuition: centralised regulation of nurse pay caused extra deaths per year amongst patients admitted to hospital following a heart attack. They also calculated that wage regulation didn’t even save the government much in direct wage costs as the benefit of lower wages bills in the South East was offset by higher pay in the North of the country so the wage savings were small. The reason for the small wage savings were that the pay review body gets the level of wages ‘right’ on average – what they get wrong is the extent of variation across different parts of the country.   These seems very plausible: the review body takes evidence from a wide variety of sources and probably therefore sets the average level correctly, but in responding to union (and perhaps also public) pressure for equality in the public sector, gives insufficient weight to regional variation.

It is likely that public sector pay regulation affects the ouput of teachers, policeman and other public sector workers in a similar way, though this is still to be confirmed.

This all suggests that in addition to examining the level of public sector pay, Hutton should be equally concerned with the variation in pay across regions.  One solution might be to deregulate pay altogether and let each employer negotiate with their local workers. However, this also has costs. First, and most obviously, such wage negotiations are costly for both employers and workers in terms of time and the need for each employer to employ HR personnel skilled in wage negotiation. But second, in labour markets in which there is a shortage of workers, negotiations between single employers and their workers may simply drive up the price of labour for all local employers as employers seek to outbid each other to attract staff. This means that no single school or hospital will wish to engage in such negotiation, because any advantage they initially get from offering a higher wage, will be quickly eroded as other local employers follow suit. Whether for the first and/or the second reason, it is the case that hospitals in England, when given the freedom to negotiate local wages in various NHS reforms have generally not done so.

The solution might be therefore to retain the pay review bodies but to ensure that they allow for much large wage differentials across the country. In so doing, they will have to resist calls from the unions – and possibly the public – for equity in pay setting. But far from being fair, such equity penalises public sector workers in high cost areas, over-reward those in low cost areas and probably harm the users of the services these workers provide.

Healthcare competition saves lives

September 17, 2010 Leave a comment

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.