Magazine article New Statesman (1996)

The Price of Competition: Differences in Hospitals in Rural and Urban Areas Have Provided Us with a Natural Experiment

Magazine article New Statesman (1996)

The Price of Competition: Differences in Hospitals in Rural and Urban Areas Have Provided Us with a Natural Experiment

Article excerpt

Governments faced with rising costs and growing demand are constantly searching for methods of delivering higher productivity in healthcare or, put more simply, ways of getting higher quality without in-creasing expenditure. The Health and Social Care Bill currently making its way through the House of Lords has placed considerable weight on the encouragement of choice and competition.

Critics of the bill are vociferous in arguing that a focus on choice and competition is, at best, misguided and, at worst, will lead to the wholesale privatisation of the National Health Service. In fact, a cool look at both the argument and the evidence gives a more nuanced and positive picture.

What is true is that, while the political appeal of competition is simple - competition works in the rest of the economy, so it should work in health care - the predictions of economic theory on this issue are quite ambiguous. Where hospitals are free to negotiate their own prices with health-care buyers, competition may lead to too much or too little quality. The * * outcome will depend on the relative importance that buyers put on quality versus cost reductions. The economic intuition is simple: where quality is hard to observe, buyers' responsiveness to quality differences between suppliers of care will be low, so they will focus more on price. In response, suppliers will tend to compete on price rather than quality, resulting in lower costs (which is a positive outcome) but also lower quality (which is not).

Economic models provide more guidance when prices are fixed by government and hospitals. When this happens, the only way to attract more patients is to provide higher quality than a rival, and models support a positive relationship between competition and quality.

What about the evidence? Testing the true relationship between quality and competition is difficult because the observed competitiveness of a health-care market may be driven by quality. For example, the presence of a high-quality hospital may mean that competitors stay out of its market.

Alternatively, hospitals in urban areas may face more competition but may also use cutting-edge technology and so deal with more difficult cases, which tend to have worse quality outcomes. In these situations, it will appear that greater competition is associated with lower quality, but competition is not the driving factor.

The last Labour administration introduced competition between health-care providers as part of its drive to increase productivity in health care. In 2006, the government mandated that all patients must be offered the choice of five hospitals and, by 2008, any hospital in the NHS for their treatment. The prices that hospitals could charge for many elective services and some emergency care were also fixed.

Rural areas are less exposed

This policy change provides a natural experiment that researchers have exploited to examine the effects of competition on quality Hospitals compete in geographical markets because patients prefer to be treated closer to home. Some hospitals will be heavily exposed to the policy, and competitive forces, because they are located in or near urban areas. Others will be less exposed because they are in rural areas. Using this has allowed researchers to explore the outcomes before and after the introduction of the Labour pro-com-petitive reforms. Their findings showed a number of effects.

First, despite the fears that the policy would have no effects, it did appear to shift patient flows between hospitals. Map A shows how exposed hospitals were to potential competition in their local markets just before the time of the policy introduction. Map B shows the change in exposure after the policy.

In Map A, hospitals are represented by dots and the lightest shade of blue shows those hospitals most exposed to potential competition while black indicates hospitals least exposed to potential competetion. …

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