In previous posts, I’ve written about the role of competition in health policy and how to create effective incentives for providers and insurers. Unfortunately, at times, discussions like these can feel abstract and removed from the policymaking process. However, recent policy proposals by the U.K. Health Secretary for the English National Health Service* illustrate that these issues—and indeed the smallest details of a policy—are far from abstract and that seemingly trivial sections of dense policy documents can have profound effects on outcomes. More tangibly, the discussions about how to integrate competition into the NHS right now illustrate that the specific manner in which competition has been deployed is vital to the outcomes that it will produce.

Over the last six months, a new government in the U.K. has proposed a series of sweeping reforms for the English NHS, many of which I support, including expanding patient choice, increasing quality transparency, and increasing competition. However, the type of competition the new government wants to introduce—simultaneous price and quality competition—has me worried.

The policy proposal at hand has come up in the context of the NHS Operating Framework that was published in December 2010. The Operating Framework, published annually, is a detailed declaration of NHS priorities and goals for the following year. In addition, the Operating Framework serves as a blueprint for the NHS, spelling out—in extraordinary specificity—how the finances, performance targets and management of the NHS will function for the year ahead. However, within this dense, 64-page document is a paragraph with profound implications.

At present, the NHS only allows hospital competition within a market with fixed prices.  However, this document outlines plans to change that and allow hospitals to compete on both price and quality. On page 54, buried deep within the document, it states, “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. Commissioners will want to be sure that there is no detrimental impact on quality, choice or competition as a result of any such agreement” (1).

This is a mammoth shift in policy. Indeed, it is one that could easily have gone unnoticed and may produce harmful results if it is not corrected. That is because most international evidence suggests that, whereas hospital competition with fixed prices can improve quality, simultaneous price and quality competition can actually make things worse (2).

In general, there can be three types of competition in health care markets: price competition, quality competition, and simultaneous price and quality competition. Price competition occurs when providers offering an identical product seek to expand their market share and the only way to do so is by lowering their price. The most intuitive example of price competition is competition between generic drugs, where because the products are so heavily regulated, patients can choose between two versions of the same molecule on the basis of cost with no concerns about whether one version of the drug is better than another.

In the hospital sector, you could have price competition between providers offering identical diagnostic laboratory tests, where providers’ only avenue for increasing their market share is through offering the same test at a lower price. Unfortunately, the scope of pure price competition is limited in health care because there are very few examples of two or more providers offering an identical service.

Quality competition occurs when providers cannot vary how much they charge, and as a result, the only way they can differentiate themselves is on their quality. This is precisely what happens with Medicare in the U.S., where providers compete to provide services but must bill at a predetermined rate that is determined by the government. In the U.S., research has found that competition for Medicare patients actually lowers death rates (3).  Indeed, England has also introduced quality competition in the NHS, and my research has found that it also leads to improvements in quality (2).

Finally, simultaneous price and quality competition occurs when providers are allowed to set their price and offer differentiated products. Here, for example, two providers could compete on offering a hip replacement both on the quality of their hip replacement surgeries and on the cost they charge for the operation. The problem is that while this type of competition works in other markets, it tends to work badly in hospital markets.

In many other types of markets, consumers are often equally sensitive to both price and quality. As a result, this type of competition, say between grocery stores, often produces good results for consumers. In contrast, in health care markets, where quality is often difficult to measure, consumers (and insurers) are often more responsive to price changes than to quality changes. As a result, most evidence suggests that when hospitals are allowed to compete on both price and quality, prices tend to fall and so too does quality (4). This evidence has led a number of analysts in England to question the current U.K. government’s proposals to shift from quality competition to simultaneous price and quality competition (5).

This case in England is an example of precisely how important both abstract theory and specificity are to the policymaking process. It’s not enough to say that competition is good for health care systems. Instead, policymakers must analyze the type of markets they’re dealing with and implement policies tailored to those particular sectors. Otherwise, without this does of realism, policy may stumble badly, and far from simply invalidating an academic theory, the results with have a very consequential impact on people’s lives.

References

1. Department of Health. (2010). The operating framework for the NHS in England 2011/2012. Retrieved from http://www.dh.gov.uk/prod_consum_dh/groups/dh_digitalassets/@dh/@en/@ps/documents/digitalasset/dh_122736.pdf.

2. Propper, C., Burgess, S. & Green, K. (2004). Does competition between hospitals improve the quality of care?  Hospital death rates and the NHS internal market. Journal of Public Economics, 88, 1247-1272.

3. Kessler, D. P. & McClellan, M. B. (2000). Is hospital competition socially wasteful? The Quarterly Journal of Economics, 115, 577-615.

4. Cooper, Z. N., Gibbons, S., Jones, S. & McGuire, A. (2010). Does hospital competition save lives? Evidence from the NHS patient choice reforms. LSE Health Working Paper – 16. London, London School of Economics.

5. Timmins, N. (2011, January 6). Hospital price competition retrograde step. Financial Times.

* The British NHS was divided into separate health care systems in England, Scotland, Wales, and Northern Ireland.

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Columnist Zack Cooper is a health economist working at the Centre for Economic Performance at the London School of Economics. His column for the Health Policy Forum considers health policy and politics, often from the international perspective. Columnists are regular contributors to the Health Policy Forum who pose their own opinions and policy positions in the realm of health care and health policy. As a leading nonprofit health care research and consulting institute dedicated to improving human health, Altarum encourages open discussion and debate about the many challenges in health care today. All postings to the Health Policy Forum (whether from employees or those outside the Institute) represent the views of the individual authors and/or organizations and do not necessarily represent the position, interests, strategy, or opinions of Altarum Institute. Altarum is a nonprofit, nonpartisan organization. No posting should be considered an endorsement by Altarum of individual candidates, political parties, opinions, or policy positions.