NHS price competition – what the academics think

Here are some links to academic research on the effects of price competition on healthcare. You probably know the conclusions already but here they are spelled out with links to the relevant research papers and the dangerous parts of the draft Bill.

Also, some handy resources for NHS campaigners:

• Blog from the The Centre for Market and Public Organisation (see two excellent recent posts from Carol Propper, The Health Bill, the NHS and the facts and Price competition to be (re)introduced in the NHS
• Appleby’s BMJ article questioning the government's use of stats
• A collection of quotable soundbites from LSE and other health economists
• Another blog like this, with summaries and links to academic evidence
• BMJ editorial on the dangers of structural reorganisations
• Ben Goldacre’s Guardian Bad Science column that reviews the evidence for reform (full of links)
• The BMA (doctors’ union) statement against "always damaging" price competition
• Richard Taylor’s proposal for a new political party - NHS Concern - to turn the May council elections into a referendum on health reform
• Blog from health think-tank Altarum Institute against price competition

Now for the nitty gritty...

What happens when patients choose on the basis of quality alone?

Competition on quality

Researchers in 2000 looked at heart attack data in the US and found that fixed-price competition among Medicare providers "unambiguously improved social welfare" (Kessler, D. P. & McClellan, M. B. (2000). Is hospital competition socially wasteful? The Quarterly Journal of Economics, 115, 577-615).

A UK study, however, found that in the 1990s competition based on loosely fixed prices made heart attack survival rates worse (Propper, Burgess and Gossage (2003). Competition and Quality: Evidence from the NHS Internal Market 1991-1999). During the period in question, prices were negotiated annually in block contracts. They were tightly regulated but still left room for some surreptitious price competition.

A different UK study looked at competition under fixed prices and found again that competition improved heart attack survival rates (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).

Together, these studies suggest that the more fixed prices are, the more lives are saved when hospitals have to compete on non-price factors such as quality of service.

Whether heart attack studies are the best way to assess general healthcare is an open question (most patients don’t choose where to have a heart attack in advance) but nevertheless, heart attack mortality seems to have become an accepted yardstick for assessing hospital outcomes.

Andrew Lansley even used it for his headline statistic that British heart attack victims were worse off than their French counterparts (although his statistic has since been condemned in the British Medical Journal for ignoring the trend of strong improvement in UK heart disease and cancer outcomes).

Broadening the scope from heart attacks, another recent paper looked at a whole range of quality measures and found that fixed-price competition caused significant improvements in overall mortality and reductions in length‐of‐stay without increasing expenditure per patient (Gaynor, Moreno‐Serra and Propper (2010) Death by Market Power; Reform, Competition and Patient Outcomes in the National Health Service).

Researchers also looked at ways to measure “efficiency”, using the pre-surgery length of stay for hip replacements as a proxy. They concluded that fixed-price competition caused hospitals to shorten the pre-surgery length of stay, ie become more efficient (Cooper, Gibbons, Jones and McGuire (2010). Does Hospital Competition Improve Efficiency? An Analysis of the Recent Market-Based Reforms to the English NHS, CEP Discussion Paper No 988).

The idea of efficiency in healthcare is a little tricky (how do you measure health with a calculator?) but it seems uncontroversial that a degree of competition would make hospitals run a little tighter. There is plenty of evidence that fixed-price competition does exactly that.

Competition on price

Andrew Lansley’s reforms, however, introduce price competition. The coalition has kept this fact quiet but it's there in black and white in the draft legislation.

Sections 103 and 104 of the draft Health and Social Care Bill provide for the regulator to set maximum prices as well as fixed prices:

103 (1) If a health care service is specified in the national tariff, the price payable for the provision of that service for the purposes of the NHS is—
(a) the price specified in the national tariff for that service, or
(b) where the national tariff specifies a maximum price for that service, such price not exceeding that maximum as the commissioner and the provider may agree.

The NHS Operating Framework for 2011/2012 shows how this would work in practice, stating at paragraph 5-43:

“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.”

This is the beginning of price competition in the NHS. What you would expect next is for providers to cut prices at the expense of quality, especially for procedures where it is hard to judge the outcome. It turns out this is exactly what the data prove.

In an important 2002 research paper, (Propper et al. (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 ), Carol Propper found that when competition is payer-driven, in other words when it is based on price, it leads to higher death rates:

[previous research shows that] under certain conditions it can be shown that payer-driven competition may bring about reductions, rather than increases, in quality (Spence, 1975, Dranove and Satterthwaite 1998).

Our results support the hypothesis that where quality signals are weak or noisy, the impact of competition is to reduce rather than increase quality. Five years or so after the introduction of the internal market the linear relationship between quality and competition is negative. Hospitals located in more competitive areas have higher death rates.

There is apparently some US research that shows price competition can improve outcomes but Propper did not find this result in the UK.

Indeed, other US research backs up her paper, finding that the introduction of hospital price competition was associated with an increased mortality rate among uninsured New Jersey heart attack patients (Volpp et al (2003) Market Reform in New Jersey and the Effect on Mortality from Acute Myocardial Infarction).

The US seems to have learnt this lesson, making its over 65s health service Medicare run on a strict fixed-price system.

Andrew Lansley has not. His Bill - as it is currently drafted - will create a national health market with increased private sector provision and price competition. The evidence says this will be a costly and dangerous mistake.