A Global Village
Issue 8 » Health Financing

On the Benefits of Competition in Healthcare

Prof. Carol Propper CBE, Imperial College Business School

Governments faced with rising costs and growing demand are constantly searching for methods of delivering better healthcare. Reforms which promote competition are currently very much in vogue: within the OECD alone, The Netherlands, Switzerland, Germany, the UK and the USA all have introduced such reforms. Yet while the political appeal is simple – in the rest of the economy competition drives up standards and drives out poor quality suppliers – critics argue that the features of healthcare make the use of competition inappropriate. Is this really the case?

The arguments against the use of competition range from the rather unsophisticated to the deep. An example at the unsophisticated end is the debate that raged in the UK in 2011 when critics of the (not very coherent) pro-market reforms of the former UK Secretary of State for Health, Andrew Lansley, conflated private delivery of services with a removal of tax finance for healthcare and predicted a total collapse of the NHS and the equity goals which underpin it. Of course, in healthcare, scare-mongering is not confined to those who oppose competition: witness the debate in the USA against Obama reforms in which high profile politicians suggested that in the NHS older people were threatened with euthanasia to reduce the costs to the tax payer.

More sophisticated criticisms focus on the role of information and motivation. With respect to information, it is argued that healthcare is an area where there are informational asymmetries: providers of healthcare always have better information than users. This will give providers monopoly power (think snake oil salesmen in the nineteenth century). A variant of this argument is that information is just too complex for users so competition will either not occur or arise around irrelevant features of healthcare. Similar arguments are often advanced in the context of complex financial products. The motivational argument states that providers of healthcare are driven by intrinsic motivation and that the introduction of extrinsic rewards which often accompany competition will drive out intrinsic motivation.

Whether – and under what circumstances – these arguments are correct is, in fact, an empirical matter. And a key issue in the use of competition in healthcare is that the evidence base from which they draw is limited. Further, what evidence there historically has been is from the USA, which is an outlier both in terms of what it spends and in the complexity of its healthcare system. Fortunately, for policy makers there is growing evidence on the use of competition in healthcare from a very different OECD system: the UK National Health Service.

Competition and Choice in the NHS
The UK NHS is a tax financed system where all individuals are insured against the direct costs of healthcare. This means the UK has not experimented with competition in health insurance. But it has introduced a range of reforms intended to increase the amount of choice users have of providers of healthcare. And a cool look at the evidence from the UK gives a positive picture of potential gains from choice and competition.

First, there is the evidence from the ‘Choose and Book’ reforms of the Tony Blair, Labour, administration. Implemented in 2006, these mandated that patients be allowed to choose from up to 5 hospitals for their treatment, and so introduced competition between healthcare providers. Previous to that date, most patients had little choice of provider.

The evidence from these choice reforms broadly suggests the following. Not all patients were offered choice, wanted it or took it up when offered. But three years after the reforms around half of patients recalled being offered a choice. Hospitals rated as better – both in terms of some measures of clinical quality and in terms of having lower waiting times – before the policy reform attracted more patients, and patients from further away after the reform. This suggests that the choice agenda had some effect on the selection of hospitals: more patients chose – with the help of their GPs – to go to better hospitals. Fears that patients would only choose on the basis of car parking or factors unrelated to clinical quality also appear to be unfounded.

Hospitals in competitive
markets increased their
quality without increasing
total operating costs 
or shedding staff

But did this movement of patients have any effect on outcomes for patients? Hospitals located in areas where patients had more choice had greater improvements in clinical quality (measured by lower death rates following admissions) and greater reductions in lengths of stay post policy than hospitals located in less competitive areas. What’s more, the hospitals in competitive markets increased their quality without increasing total operating costs or shedding staff. While reductions in death rates are a pretty crude indicator of quality and are contested, they are also used by healthcare regulators in many countries as a measure of hospital performance. Further, these changes appear to have benefitted patients from deprived areas as much as those from better off areas. So these reforms appeared to have brought gains to patients.

Second, there is evidence that hospital consolidation and mergers did not improve outcomes for patients. Whilst outcomes in specialist departments such as care for critically ill babies or heart attack patients may improve when services are consolidated, a study of mergers and consolidation in UK hospitals in the late 1990s suggested that mergers promised much before the event but delivered much less after the event. As mergers tend to reduce the potential for competition in a local market, these findings also suggest that there are benefits from competition in an NHS type system.

Third, from a rather different perspective, researchers looking at the quality of management of hospitals in the NHS have found that better management is associated with better outcomes and that management tends to be better where hospitals compete with each other.

Finally, from elsewhere in Europe there is also evidence which broadly supports competition. The Netherlands has had a mixed system of provision for many years and has slowly introduced competition. There is no evidence that this has massively harmed equity and is thought to have led to improvements in service delivery.

In sum, the arguments may be more nuanced than many politicians (and perhaps health commentators) would like. But there is no evidence from recent experiments in the UK that allowing patients more choice and exposing poorly performing hospitals to the threat of their patients choosing another provider has led to poorer outcomes for patients and large equity issues. On the contrary, the evidence we have suggests that competition and choice – as in the rest of the economy – has the power to improve outcomes for patients.

Prof. Carol Propper CBE is Professor of Economics and Head of the New Health Management Group at Imperial College Business School. She is also appointed to the University of Bristol where she co-founded the Centre for Market and Public Organisation.  

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Gaynor, M., Laudicella, M. and Propper, C. (2012) Can Governments Do it Better? Merger Mania and the Outcomes of Mergers. NHS Journal of Health Economics, 31(3): 528-543. Bloom, N., Propper, C. and Seiler, S. and van Reenan, J. (2010) The Impact of Competition on Management Quality: Evidence from Public Hospitals NBER Working Paper Series number 16032. Gaynor, M., Moreno-Serra, R. Propper, C. (2010) Death by Market Power. Reform, Competition and Patient Outcomes in the National Health Service NBER Working Paper number 16164. Mays, N., Dixon, A., Jones, L. (2011) Understanding New Labour’s Market Reforms of the English. London: Kings Fund.