Editorial Thursday 9 August 2012: Sense about competition in a silly OECD report

I turned to the OECD report on competition in hospitals with some trepidation.

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Click here for details of The red ties that bind Comrade Sir David: postmodern NHSCB to commission itself (oh yeah, and what cowboy drafted this mandate?), the new issue of subscription-based Health Policy Intelligence.

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I feared it might be good, you see, and it is 400 pages long and I go on holiday tomorrow with Health Policy Intelligence renewal invoices still to send (hint hint, website users: £69 a year for Health Policy Intelligence is a bargain and allows this site to exist. My bills do not pay themselves.)

Much to my relief, it talks enough shit in the summary for me to not feel obliged to read the lot.

It suggests that "hospital services have been traditionally over-regulated", which may come as a bit of a surprise to followers of Mid-Staffs, Stoke Mandeville, Papworth, Basildon and Thurrock - insert your own list of problem providers.

Incompetently regulated, no doubt. Un-self-regulated, too, without a doubt.

But over-regulated? Horseshit.

The dung continues - "Hospital markets deviate from the theoretical notion of perfectly competitive markets because services are differentiated rather than homogeneous, market structures tend to be oligopolistic, entry and exit are costly, while transaction costs are very high".

What a steaming pile of manure is festering there. In fact,

1. Only fools believe in perfect markets; culture and sociology are crucial in all markets. See also Kenneth Arrow (1963) on 'Uncertainty and the welfare economics of healthcare
2.  Much of most hospitals' work is pretty homogenous: a fractured neck of femur requires pretty similar treatment everywhere.
3. Few hospitals are truly differentiated (cancer / tertiary). Hospital markets in urban settings are certainly not oligopolistic, or choice (without which, guess what? no competition) would be impossible.
4. Market mechanisms in healthcare have raised management and transaction costs. That may be worthwhile, but it isn't proven.

PFI-tastic!
For the truly economically illiterate, the summary goes on to assert that "public-private partnerships allow provision of healthcare infrastructure with limited burden on public finances".

As if this were not enough, it suggests that "no comprehensive evaluation of these partnerships has yet been conducted, thus there is little conclusive evidence on their relative merits". It is just possible Professor Alysson Pollock may have something to say about that.

So don't bother reading the main report, but I do urge you to go to page 313, because it features an excellent and readable summary paper by Zack Cooper of LSE about the impact of competition in the NHS over the last decade.

He points to the published research evidence, and doesn't over-claim for competition, noting the arrival of significant new money throughout the decade in which the reforms took place.

Cooper's conclusion bears quoting in full: "From 2000 onwards, the English National Health Service went through a series of profound reforms that injected hospital competition into a health system that historically had few financial incentives for health care providers. These reforms have proven largely successful and they provide an opportunity for outside observers to learn from the English experience with competition.

"Within England, policy-makers took specific steps to address the commonly known ways that health care markets differ from textbook, perfectly competitive markets which form the backbone of micro-economic theory. In order to make the hospital markets in England function, policy-makers introduced competition on quality (not price), created a substantial role for patients’ general practitioners to act as patients agents, and worked to publish information on providers’ performance in order to inform patients’ choices.

"In addition, policy-makers took advantage of the historical centralization of the NHS, which allowed those setting prices in England to, for instance, have access to hospital cost information.

"The story that emerges from the recent NHS reforms is not that competition is unambiguously good and that centralization is unambiguously bad. The story is that competition can be an effective tool to create financial incentives for health care providers to improve their performance as long as certain conditions are met.

"More than that, a second key finding to emerge from the English experience with competition is that the historical centralisation of the NHS was likely hugely advantageous to policy-makers working to create a dynamic hospital market. This historical centralisation allowed policy-makers to introduce measures designed address some of the commonly known pathologies present in healthcare markets and create an environment where hospital competition could improve providers’ clinical quality and increase their productivity".