Opening the black box: the links between competition and quality

Because of the controversy surrounding the choice/competition policies enacted by the Blair Government and advocated in the Health and Social Care Bill, research that has shown that these reforms were, by and large successful, has itself become politicised.

While this is to be expected, it has made it harder to talk about the cost-benefit analysis of competition, the mechanisms through which competition can potentially improve performance, and more generally how to improve performance in the NHS.

This report by researchers at the Institute for Fiscal Studies (IFS), commissioned by the Nuffield Trust, gives another opportunity to shift away from the binary yes/no discussions of choice and competition towards a more nuanced discussion of how to shepherd the NHS through a challenging period of fiscal contraction and understand different ways in which policy-makers can improve hospital performance.

These findings also buttress our earlier work on competition and illustrate that there were other changes occurring during the 2006 period that were very consistent with our primary finding that competition improved quality.

Five years after choice and competition were introduced in the English NHS, my colleagues and I undertook some work which found that competition prompted hospitals to improve clinical quality and elements of technical efficiency.

Our findings were echoed by work by Carol Propper and her colleagues, who obtained nearly identical results. Our collective findings were consistent with economic theory, which predicts that competition in the right settings – namely in markets with fixed prices – tends to improve quality.

The virtue of our two papers was that we looked at the big picture: we examined the impact a policy introduced in No10 had on patients on the ground. Our strategy to identify the impact of competition, econometric techniques aside, was straight forward. We wanted to see whether hospitals in areas where patients had more choice (and hence hospitals had more potential to compete) did better after patients could exercise that choice.

The drawback of our work was that there was a large ‘black box’ remaining. We didn’t know what was happening inside hospitals to produce these observed changes and we could not infer whether it was actual competition, or the threat of competition which drove hospitals to improve their quality.

To opponents of competition in the NHS and other skeptical parties, this led to claims our work merely detected correlations, rather than a causal relationship between competition and hospital performance.

This report, as part of a joint research programme between the IFS and the Nuffield Trust, sheds more light on the black box and is suggestive that our earlier work, which found that competition improved quality, was likely causal.

Results from this analysis suggest that patient exit – i.e. actual changes in referral patterns – did occur and likely played a role in our findings. This important work found that after patients had the ability to switch providers, there was an 8 per cent change in referral patterns for elective care. Interestingly, there were no changes in emergency referrals (where patients don’t have a choice).

Why did this matter? Did this put pressure on incumbent NHS hospitals?

Well, a quick glance at providers’ financial books during this period reveals that a 5-10 per cent change in elective volume would have a real impact on hospitals’ bottom line. In short, losing 5-10 per cent of their elective activity would throw many trusts into deficit.

As a result, it’s plausible that the introduction of choice really did send sharp signals to providers that they needed to improve performance in order to retain patients and create loyal GPs. Indeed, these results illuminate the pressure hospitals were under to create the type of improvements my team and Carol Propper’s team observed.

Professor Zack Cooper is an Assistant Professor of Health Policy and Economics at Yale University. Please note that the views expressed in guest blogs on the Nuffield Trust website are the authors’ own.