There is evidence that competition between hospitals can drive quality and cost improvements if the market is carefully designed.
The question of whether competition has any role in healthcare provision is highly contentious. Many participants start with strong ideological positions and are more concerned with justifying their position by any means than in taking a skeptical and dispassionate view of the evidence. This encourages many debaters to make arguments based on economic theory rather than actual real world evidence. It is worth reviewing some of the theory if only to emphasise the importance of real world evidence.
In this argument, theory is just a distraction
One of the more vocal objectors to competition in the NHS is Lucy Reynolds. She frequently uses arguments from economic theory to show why competition can't work in healthcare (frequently quoting a famous paper from Kenneth Arrow in 1963). The most concise summary of her position is here:
1.First, the assumptions underlying the market model really don’t fit at all well. These include:
No barriers to market entry or exit: but doctors need to be trained for years and hospitals need expensive facilities which aren’t easily converted to alternative uses.
Product homogeneity: but any clinician will tell you that for most conditions, there is great individual variation in the treatments needed for different patients, even those who have the same diagnosis.
No transaction costs, meaning no costs to provider or patient of
getting to the point where a treatment is sold: but clearly either the
patient must visit the doctor or vice versa, and the costs of
consultations and diagnostic tests are well above zero.
Perfect information about the healthcare transaction between doctor
and patient so that they can strike a fair price for the services
purchased: but of course patients don’t go to medical school or
receive clinical training in hospitals so they often have very little
comprehension of what is wrong with them. A substantial minority of
people in this country believe in homeopathy, crystal healing and
suchlike: they lack even a basic grasp of the science underlying
medicine, so how can they be considered to have enough understanding
to know if the doctor’s prescription is the best thing for them or
whether it is based on the best interests of the hospital’s profit
and loss account?
She summarises the anti-market case well. But there is a fatal flaw in the argument: no other real world market even comes close to satisfying those assumptions either. Apparently economic theory isn't that useful at telling us whether markets work.
John Kay makes a powerful argument for looking to the real world for evidence in his book The Truth About Markets: Their Genius, Their Limits, their Follies. He rejects fundamentalist theory and focusses on what happens in the real world. He characterises the keys to market success as being akin to the forces driving biological evolution: variety and selection. These two factors drive improvement over time. But markets often need outside intervention to preserve these two key drivers, so getting social benefits from market activity may require careful government intervention.
The point of this theoretical interlude is that it explains why we have to interpret the evidence carefully: badly designed markets won't show benefits; well designed markets might.
The NHS has tried two ways of introducing competition: the evidence so far shows that only one worked
Competition was first introduced by John Major's Conservative government between 1991 and 1997, abolished when Tony Blair's Labour party won in 1997, but then tried again in a different form from 2002 as Blair realised the NHS needed stronger incentives to improve. There is a good summary in Gwyn Bevan's 2011 review of NHS competition in the BMJ:
During 1991–97, a period of limited growth in NHS funding, an “internal market” was introduced throughout the United Kingdom. It changed health authorities’ responsibilities by separating the roles of purchaser and provider of healthcare. Hospitals were made independent of health authorities, typically as directly managed units, which became NHS trusts regulated by the Department of Health. Health authorities contracted selectively with providers and constrained general practitioners’ referral options. However, general practitioners who opted for various forms of general practice fundholding were allocated cash budgets to contract for elective care and could choose where to refer their patients. Competition was between NHS trusts and private providers. NHS trusts were expected to avoid financial deficits but could not retain financial surpluses and hence arguably lacked strong incentives to increase market shares. There was little information on, and no external regulatory oversight of, quality of care.
From 1997, the new Labour government abolished general practice fundholding and strongly discouraged competition in favour of a more cooperative model. Nevertheless, the distinction between purchasers and providers was retained, thus preserving scope for competition via selective contracting by purchasers (primary care trusts or PCTs).
The “New Labour” hospital market, which applied only to England, was developed from 2002 onwards, a period of sustained increases in NHS funding (about 5% per year). Under this model PCTs contracted selectively with providers. Within the PCTs, practice based commissioners, which could be thought of as an extension of the general practice fundholding model, also contracted with providers but had indicative budgets only. Competition was again between providers, but there were more of them: NHS trusts, private providers, independent sector treatment centres, and NHS foundation trusts. Foundation trusts were high performing trusts that met Department of Health criteria for autonomy and were subject to approval and oversight by a new regulator, Monitor. They were allowed to retain financial surpluses and hence arguably had incentives to increase market shares.
Some of the key differences between the two exeriments are worth emphaising before looking at the actual evidence:
- The first experiment allowed price competition but had poor availability of information about or regulation of quality or performance of hospitals.
- The second experiment started with much better information about performance and quality and did not allow providers to compete on price (national prices were set per Healthcare Resource Group (HRG) [similar to the US DRG]); providers could compete on quality and other factors to attract more patients.
One factor common to both experiments was that the buyers were not patients but other professionals (often medics) who were well equipped to judge the quality and effectiveness of the clinical care on offer. This goes a long way to making Kenneth Arrow's objection to healthcare competition irrelevant: patients may be ill-equipped to judge the quality or effectiveness of treatment when faced with a doctor or hospital who is, but the actual purchasers are not.
The NHS is also distinct from many other health systems in that the patients do not pay either directly or via competing insurers: the Government acts as the universal insurer for the population.
The evidence so far suggests that well-designed competition can save lives and lower costs
The results from the first experiment in the NHS were mixed. Carol Propper summarises in this review (which also contains many references to other analysis, some from the US market so is a useful source for further reading and more detailed evidence):
The evidence suggests that greater competition was associated with lower costs (Söderlund et al, 1997). The bargaining power of district health authorities was lower than that of GP fundholders, and hospitals that had greater business from fundholders had lower posted prices (Propper et al, 1998; Propper, 1996). On the other hand, two large-scale studies of the
association between competition and quality suggest that quality – as measured by
deaths of patients admitted to hospitals with heart attacks – fell during the internal
market (Propper et al, 2004, Propper, Burgess and Abraham, 2002). This combination
of falls in price and quality fits with the predictions of economic theory: where
demanders are sensitive to price and quality information is weak, both prices and
quality are likely to fall as competition increases.
In summary, a market with poor information and weak purchasers led to some gains in costs, but compromised clinical quality. This is not regarded by many as a good tradeoff.
More recently, evidence has started to emerge about the second NHS experiment.
A review by the Centre for Economic Performance (at the London School of Economics) and McKinsey summarised the evidence linking good management practices to both hospital outcomes and costs. And it also concluded that hospital competition improved the quality of management.
In 2011 two groups independently reached the conclusion that more competition both improved mortality by significant amounts and improved efficiency. Zack Cooper's team published in The Economic Journal (paywalled but their discussion paper is here). They conclude:
...we find that mortality fell more quickly (i.e. quality improved) for patients living in more competitive markets after the introduction of hospital competition in January 2006. Our results suggest that hospital competition in markets with fixed prices can lead to improvements in clinical quality.
Other papers from the same team concluded that efficiency also improves.
Meanwhile Propper's team had independently reached a similar result (working paper here). Propper summarises:
In recent research along with Rodrigo Moreno-Serra (Gaynor et al. 2010), we look at all admissions to hospitals in the National Health Service – around 13 million admissions – pre- and post-policy. We find that hospitals located in areas where patients have more choice are of a higher clinical quality – as measured by lower death rates following admissions – and their patients stay in hospital for shorter periods compared with hospitals located in less competitive areas. What’s more, the hospitals in competitive markets have achieved this without increasing total operating costs or shedding staff. These findings suggest that the policy of choice and competition in healthcare can have benefits – quality in English hospitals in areas in which more competition is possible has risen without a commensurate increase in costs.
These results suggest that the details of the policy matter. Competition under fixed prices appears to have beneficial results while competition where hospitals bargain over price and quality does not. This in turn has policy implications for governments who are keen on introducing market forces to healthcare.
To summarise: competition among hospitals can have quality and cost benefits, but governments have to get the design of the market right to see those benefits. This goes some way to explaining why the historic evidence is so mixed.
The best evidence we have from the NHS suggests that even the relatively timid introduction of competition can have benefits from both patients (improved clinical quality) and governments (improved efficiency). But getting this required careful design of the system.
I should note that the results presented above are controversial. But they show that many of the theoretical objections raised in response to the original question can be addressed and actual experimental evidence can be brought to bear on a difficult and controversial area.