Competition – what do we know?

Blog post

Published: 17/02/2011

Competition is a hot topic with the publication of the Health and Social Care Bill last week. Given the level of interest and feeling this issue excites we decided to hold a round table discussion earlier this year to review the evidence.

Despite what many people may think, for most economists, competition is not an objective in its own right but a tool to achieve the objective of economic growth.  Economic theory and empirical research suggests that competition is an important ingredient in economic success so economic policy should seek to promote competition.  This is essentially a utilitarian view of competition: ‘if it works why wouldn’t you do it’.

Buying health care is not like buying baked beans, handbags or air travel. Health care is complex and breaches many of the conditions that economic theory suggests are necessary for competition to be effective.  

While there are other markets with some of these problems – the utilities being a prime example – health is often considered to be one of the most problematic markets to introduce competition because it has multiple ‘market failures’. 

The other difference between health and many other markets is that we don’t just care about efficiency.  The goal of public policy is also equity. By and large markets are not very good at delivering equity.

So why over the last 20 years has competition become such an important strand of health policy here and in other countries? 

Over the last year, two pieces of work have been published by the London School of Economics and National Bureau of Economic Research that look at the impact of competition in the English NHS following the introduction of patient choice and payment by results under the last Government.

The two studies look at the impact of competition for elective in-patient care (hip replacements). Both found a significant, albeit relatively small, improvement in quality as measured by death rates from acute myocardial infarction (AMI, commonly known as a heart attack) associated with the introduction on competition with fixed prices.

This work is important because it contrasts with earlier work by Carol Propper and colleagues at Bristol which found that the competition in the internal market of the 1990s was associated with a fall in quality. 

The big difference between the two periods is that in the 1990s competition between hospitals was on quality and price, whereas in the later reforms prices were fixed under the payment by results (PbR) system and competition was restricted to quality.  This is broadly consistent with US work that finds that competition is more likely to be associated with improved quality if prices are fixed. 

At the Nuffield Trust we have concluded that competition can, in the right circumstances, be a useful tool to improve quality.

So we welcome the provisions in the Bill which require the new economic regulator to promote competition only ‘where appropriate’ and to make clear that it must operate within the framework of the four goals for the Secretary of State: ensuring comprehensive service; improving quality; reducing inequality; and promoting autonomy.

Competition is not the only or, even necessarily, the main way services will be improved and made more efficient – there just isn’t enough evidence to tell and if it is implemented in such as way as to stop the development of more integrated health care it could backfire.  That will depend on the stance taken by the new economic regulator and commissioners. 

But we are really disappointed to see that the Bill enshrines the proposal in the White Paper to shift from fixed prices to maximum prices. The evidence does not seem to support such a move.  We’ve published a briefing note on the Bill if you want to find out more. 

That’s the utilitarian perspective. But for many of those involved in health care the debate over competition goes beyond this utilitarian analysis of what will or won’t work to consider the values of the NHS. 

For many people competition is seen as challenging the core values of the NHS with its implied neutrality between public and private providers and its focus on financial incentives to drive up organisational and system-wide performance. 

Is the NHS principally about ensuring people have access to health care free at the point of use or is it predominantly a network of public sector providers delivering health care to a local population, ‘my local, NHS hospital’? 

Competition starts to shift the focus of the NHS towards ensuring access and less on supporting an existing network of providers. It’s a subtle difference but people are right – it’s an important one which should be debated.

Wherever you stand on the issue of competition one thing is clear – we need more evidence.  This point came out very strongly at our recent roundtable discussion. 

Twenty years into the journey towards a competitive market for the supply for health care services it is remarkable how little we know about the impact of competition. The reforms of the 1990s and those of the last Government didn’t have a systematic programme of economic evaluation. 

Given the complexity of health care the chances of any programme of reform getting everything right at the beginning must be tiny. In that context, learning in order to improve and develop policy is vital.  These reforms must be properly evaluated so that the system can evolve in line with evidence. 

The Nuffield Trust has now published a short report following on its recent roundtable: Making markets in the NHS work: a competition policy seminar.  A range of resources from this event including audio interviews and downloadable presentations from the key speakers are available now.  This was the first in a series of Nuffield Trust discussions that are aiming to assess how market mechanisms can be developed to improve the efficiency and quality of health services.

Suggested citation

Charlesworth A (2011) ‘Competition – what do we know?’. Nuffield Trust comment, 17 February 2011.