NHS: Healthy competition

21 March 2012

By Carol Propper

Governments faced with rising costs and growing demand are constantly searching for methods of delivering higher productivity in healthcare, or, more simply, ways of getting higher quality without increasing expenditure. A current favourite 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 healthcare. Unfortunately for politicians, this is not necessarily the case and the predictions of economic theory on this issue are quite ambiguous. But when prices are fixed by government and hospitals compete in terms of quality and not price, theoretical models do indeed support a relationship between competition and quality.

Testing this theory is difficult because the observed competitiveness of a healthcare market may be driven by quality. For example, the presence of a high-quality hospital may mean that competitors stay out of its market. Alternatively, hospitals in urban areas may face more competition but may also use cutting-edge technology and hence deal with more difficult cases and have worse quality outcomes. In these situations it will appear that greater competition is associated with lower quality, but competition is not the driving factor.

How competition affects quality

The policy reforms that occurred in the NHS in mid-2000 provide an opportunity to test the relationship between competition and hospital quality. In Britain the last Labour administration introduced competition between healthcare providers as part of its drive to increase productivity in healthcare. In 2006 the government mandated that all patients must be offered the choice of five hospitals, and, by 2008, any hospital in the NHS for their treatment. The prices that hospitals could charge were also fixed. This policy change provided a natural experiment that researchers can exploit to understand the effects of competition on quality.

Hospitals compete in geographical markets because patients prefer to be treated closer to home. Some hospitals will therefore be heavily exposed to the policy (and competitive forces) because they are located in or near urban areas; others will be less exposed because they are in rural areas. Exploiting this fact allowed researchers at the ESRC Centre for Market and Public Organisation (CMPO) at the University of Bristol to explore outcomes before and after the introduction of competition across different markets. They examined all admissions to hospitals in the NHS (around 13 million) pre- and post-policy, leading to a number of findings.

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