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Free to choose?

January 28, 2013 Leave a comment

Authors: Marty Gaynor, Carol Propper and Stephan Seiler

Free to choose?

Greater choice and competition in healthcare is a popular reform model. This column discusses recent research suggesting that once restrictions on choice in the UK’s NHS were lifted, patients receiving cardiac surgery became more responsive to the quality of their care. This saved lives and gave hospitals a greater incentive to improve quality.

A central plank of the NHS reforms implemented by the UK Labour government of the 2000s was the introduction of patient choice. For the first time in the history of the NHS it was mandated that patients should have a say in the choice of hospital when being referred for an elective treatment. Rather than relying entirely on their general practitioner (GP), patients were now offered a set of five hospitals to choose from. At the same time, GPs were no longer tied to a particular hospital through selective contracting agreements and could refer patients more easily to any available hospital in the country. The intention behind the reform was to make referrals more responsive to hospital quality. The argument was that this in turn would increase hospitals’ incentives to improve quality. Although most economists subscribe to the idea that more choice always constitutes an improvement, things are slightly more difficult in the case of healthcare. Contrary to most consumer goods markets, evaluating hospital quality is not a trivial task, and patients might indeed find it hard to pick the best hospital for a particular treatment. This is presumably even more of an issue in the UK, where patients are not accustomed to makingchoices in the context of healthcare.

Do referrals respond to quality?
We set out to analyse whether referral patterns did indeed become more responsive to quality after the introduction of the reform (Gaynor, Propper and Seiler 2012). As a first test for whether this is the case, we analyse whether relatively better hospitals attracted a larger number of patients for one particular procedure: elective coronary artery bypass graft (i.e., heart bypass surgery). We look at the relationship between hospital quality, as measured by patient survival rates, and market shares separately for the time periods before and after the reform. Interestingly, we find that market shares are not correlated with hospital quality pre-reform, however they show a significant correlation with patient survival in the post-reform period. This gives us a first piece of evidence suggesting that patients were indeed allocated to relatively higher-quality hospitals after the reform (but not before). The magnitude of the effect of quality on market shares is economically significant. Post-reform, a one percentage point lower mortality rate led to the hospital attracting 20 more patients every year. This corresponds to about a 5% increase in market share.

In a second step we model patient behavior at a more micro level. Instead of analysing only aggregate shares of patients at each hospital, we model hospital choice individually for each patient. This allows us to incorporate the effect of the patient’s location relative to the hospital as well as to analyse how reactions vary across different patient groups.

We find, also at this level of analysis, that patients became more sensitive to the quality of service as measured by patient survival. However the effect differs substantially across patient groups. Our results show that more severely ill patients react more strongly to the reform, i.e. they are even more likely than the average patient to end up at a high-quality hospital post-reform. In other words, we see the reform having the strongest effect for the group of patients that is presumably most in need of high-quality treatment. Similarly, we find a stronger effect of the reform on patients who reported in a survey that they were informed about the choice reform at the point of referral.

Finally, we also analyse whether poorer patients reacted differently to the reform. A major concern of skeptics of the reform was that only affluent, well-educated patients would be able to process the necessary information and make an educated choice. According to this logic the reform would therefore effectively increase inequality in quality of healthcare. Our analysis however, shows that fortunately these concerns were unfounded. We find that poorer patients reacted no differently from other income groups to the introduction of choice. They did indeed react slightly more strongly, but the difference is not statistically significant, i.e. we cannot confidently tell it apart from noise in our data.

Methodology
We then employ our statistical estimates to quantitatively evaluate the impacts of the reform. We perform the following thought experiment. We compare the actual hospital choices patients made post-reform with the hypothetical choices the same set of patients would have made prior to the reforms, i.e., had referral patterns not changed in response to the freeing of choice. Because we know the sensitivity of referrals to quality pre- and post-reform, we can calculate the probability of visiting each hospital that is available to the patient under either level of responsiveness to quality. Artificially depriving patients of the benefits of the reform allows us to see to what extent patients would have ended up in lower quality hospitals in the absence of patient choice. Using the hospitals’ patient survival rates (adjusted for differences in case-mix, i.e. the severity of the cases treated at each hospital) we find that nine fewer patients (relative to slightly over 300 deaths a year, i.e. around 3%) would have survived every year had the reform not been implemented.

Unexpected drop in mortality rates
The drop in mortality post-reform is an important effect of the introduction of patient choice that was not emphasised by policymakers. Even if the increased responsiveness of referrals to quality did not change hospitals’ performance in any way, the reallocation of patients still leads to better health outcomes. This is due to the fact that patients now visit on average a higher quality hospital from the existing distribution of quality across hospitals.

The hope of the reform was that the quality distribution itself would change due to hospitals’ increased incentives to improve quality in order to attract patients. We next analyse whether there is reason to believe that such a change in hospital quality might have happened. To get a sense of the effect of the change in referrals on hospitals, we compute the change in patient admissions to each hospital if patients had been choosing their hospitals pre-reform according to post-reform referral patterns. This thought experiment – what would have happened had the reform been adopted earlier – gives us a direct sense of how much competitive pressure hospitals found themselves facing when the choice reform kicked in. When calculating the change in market shares we find a very substantial impact for some hospitals, with one hospital losing almost 10% of its market share due to the effects of the reform. There is substantial heterogeneity in the impacts across hospitals however, with most hospitals experiencing more modest changes in market share of around 2% or 3%. There is therefore good reason to believe that at least a significant subset of hospitals had substantial incentives to improve quality in order to retain (or enhance) their market shares of patient admissions.

Do hospitals pay attention to the new system?
In a final step we directly analyse whether there is any evidence of hospitals reacting to the change in referrals by increasing quality, as measured by a fall in mortality rates. To this end we look at whether hospitals that faced the strongest pressure post-reform (as measured by the potential loss in admissions) saw a bigger decline in their mortality rates than other hospitals. We do indeed find that this is the case. Hospitals which had the biggest increases in the responsiveness of patient admissions to their mortality rates had the largest declines in mortality rates, and vice versa. This result closely mirrors related work by Cooper et al. (2011) and Gaynor et al. (2012) who show that areas with more competition experienced a larger increase in patient survival rates after the introduction of patient choice.

In summary, we assess that the reform reduced cardiac bypass surgery mortality by 3% by re-allocating patients to better hospitals. This is clearly a lower bound on the beneficial effect one might expect from allowing choice, as we look only at the effect for one particular procedure. Secondly, we find evidence suggesting that hospitals responded to increased choice by improving their quality. If this is mirrored as a hospital-wide effect, there may be substantial additional positive benefits for patients. Finally, our findings add support to earlier evidence that indicate that the choice reforms led to falls in mortality in other treatments and shorter lengths of stay without increasing hospital total costs (Gaynor et al., 2012; Cooper et al., 2011) and also to work by Bloom et al. (2010) that indicates that more competitive environments have better management practices that are in turn associated with better hospital performance.

References
Bloom, N, C Propper, S Seiler, J van Reenen (2010), “The Impact of Competition on Quality: Evidence from Public Hospitals”, NBER Working Paper, 1630.

Cooper, Z, S Gibbons, S Jones, and A McGuire (2011), “Does Hospital Competition Save Lives? Evidence from the English Patient Choice Reforms”, Economic Journal, 121 (554), F228-F260.

Gaynor, M, R Morena-Serra, C Propper (2012), “Death by Market Power: Reform, Competition and Patient Outcomes in the British National Health Service”, forthcoming in American Economic Journal: Economic Policy, See also University of Bristol Centre for Market and Public Organisation, Working Paper, 10/242.

Gaynor, Martin, Carol Propper and Stephan Seiler (2012), “Free to Choose? Reform and Demand Response in the English National Health Service”, CEP Discussion Paper, 1179, November.

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

The NHS and reform

November 3, 2011 1 comment

Carol Propper

The House of Lords is currently grappling with the proposed Coalition reforms to the NHS. But even as their Lordships debate, the new NHS Commissioning Board, which is at the heart of the government’s reforms in England, is due to start work. The Board will have a major role. It will take on the day-to-day running of the NHS, with a staff of around 3,500 and have overall responsibility for NHS care worth £80bn. It will also oversee the new clinical commissioning groups led by GPs and other clinicians who will “buy” care within the NHS, and organising the treatment of complicated conditions such as heart transplants.

The NHS is very good at delivering care within budget but it struggles to enact innovation and its productivity record is poor.  At the heart of the reform programme proposed by the Coalition is the belief that plurality in provision in the NHS will foster innovation and productivity. While the medical unions, broadly defined, have run an active campaign against plurality equating it with privatisation and an increase in inequalities,  plurality on the provider side is a model used by many health care systems, including France, Germany and the Netherlands, as the best way they know of for delivering health care. In addition, we know from studies of the rest of the economy that much innovation comes from new entry and the exit of poorly performing incumbents.

The actions of the clinical commissioning groups are central to whether change in the patterns of care provision in the NHS change or whether the current incumbents, dominated by the large acute hospitals, retain their grip on provision. And the actions of the Commsisioning Board are critical to whether this will happen or not. The Board could either encourage commissioners to break out of the traditional mould and encourage plurality and diversity or it could stifle it by being overbearing and over-prescriptive.

At present, Sir David Nicholson, chief executive of the Board, seems very mildly interested in plurality. He has said that the Board will publish information about general practice, so that people can compare what their GP provides compared with others in the area and nationally and he has said that “We think this will be a very powerful mechanism for patients to make choices about which GPs they use.” But big deal: such choice and information has supposed to be available to health care users for at least the last 5 years. There is a danger that Nicholson and his colleagues think this is radical. If so, then any hope for plurality is dead, as the real issues that will have to be tackled – such as stopping supporting poor providers and actively allowing people to move away from them, are far larger than simply posting more data on the opening hours of GP surgeries.

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.