Competition in the NHS: the rules of the game

The debate about price competition in the NHS is a very good example of a more general point: the impact of competition in health care will depend on the ‘rules of the game’.

The Health and Social Care Bill sets out some of the parameters for competition but much of this is of necessity very broad and open to interpretation.  This job of interpretation falls largely to the new economic regulator – Monitor.  Its approach (or regulatory stance in the jargon) will have a profound effect on the way competition evolves over the coming years.

The market mechanism session of the Nuffield Trust’s third annual Health Strategy Summit explored some of the key issues that the new economic regulator will have to address to be effective.

The session was chaired by Professor Alan Garber of Stanford University.  Alan Garber is unusual as he a professor of economics and a practicing physician.  From this stand point he is able to bridge the seemingly vast divide between the debate about quality improvement among medical professionals and the approach of economic regulators.

The Summit also heard about the experience of economic regulation in the utilities (gas, electricity and communications) and the East of England SHA’s approach to competition.

There were many interesting themes but one stood out: the approach to pricing is really fundamental.   The current Payment by Results (PbR) systems sets annual prices for individual hospital spells for over 1,000 different diagnostic related groups.  The PbR system was useful when the challenge facing the NHS was reducing waiting times for elective surgery but it also has huge limitations.  Alan Garber highlighted the real risk that it could ossify innovation.

The IT revolution is a great example of how innovation doesn’t just change the process of production, it changes the output – the computer made the typewriter obsolete but it is not the same as a typewriter.  If there had been a PbR system of pricing for typewriters would anyone have designed the lap-top?

So, one of Monitor’s key priorities must be to take a long hard look at the current PbR system. The NHS needs a payment system which places more emphasis on outcomes and less on activity.  It needs to develop prices across pathways or a year of care to provide the scope and financial incentive for innovation.