Provider Competition on Price

The Department of Health (DH) has again been forced to deny that a measure in the NHS Operating Framework for 2012-13, published on 24 November 2011, could introduce price competition between hospitals for elective procedures.1

In the past, there have been a number of systems by which NHS hospitals are paid for the care they provide. Since 2002 the Payment by Results system has fixed prices for health care in England. Hospitals thus receive a set fee (or tariff) for each service they provide to patients from the commissioners at local primary care trusts who are responsible for planning and paying for care for the local community. Consequently, any element of competition for patients between hospitals is based on the standard or quality of care they provide, rather than differences in the price of care.

The NHS Operating Framework for 2011-12, published in December 2010, initially set out how NHS trusts in England would in future be allowed to compete on price. The proposals would have offered providers the opportunity to attract more patients by offering services to commissioners at ‘discounted’ prices less than the maximum tariff. In March 2011, however, following concerns raised by a number of bodies, the Health Secretary, Andrew Lansley, tabled an amendment to the Health and Social Care Bill which explicitly ruled out this possibility.2

The Operating Framework for 2012-13 states that commissioners would have to lower what they paid a provider if the ‘type of patients’ treated meant the provider had lower costs, for example if a hospital operated on a less complex patient group. Commentators argue that this marks a return to price competition. The DH however maintains that where there is a national tariff, there cannot be price competition and competition should be on the basis of quality alone.1

Evidence for possible benefits

The proposal set out in the 2011-12 Operating Framework to allow providers to compete on price was part of a package of reforms aimed at increasing the role of market mechanisms in the NHS. As a separate policy summary notes, there is some evidence that competition between hospitals may improve care quality in certain circumstances, but there are serious limitations to the design of this research and it must be interpreted with caution.

Evidence for possible harms

Theoretical economic models predict that quality will improve when prices are fixed because hospitals are incentivised to compete on quality to attract patients. However, when providers are allowed to set both price and quality, the impact of competition is less clear.3

In contrast, research suggests that care quality could suffer. Studies of Medicare patients in the United States suggest that price competition may provide an incentive for hospitals to under-invest in services to enable them to offer care at a reduced cost.4 The relevance of this to the NHS may be limited because of differences between the two health systems. However, evidence from the 1990s NHS internal market also suggests that price competition led to lower quality of care and higher death rates.5

Implications for health and well-being

The proposal to allow price competition was dropped because of concerns raised by a range of groups, including pro-market commentators, who argued that it would lead to a ‘race to the bottom on price that would almost certainly threaten quality.’6 Although the evidence base is limited and partly relies on theoretical economic models, competition on price is thought to be associated with decreased care quality because of under-investment in services by providers in order to save money and hence risks to health.7

Author: Dr Helen Barratt, Wellcome Trust Research Training Fellow, University College London

References
1. Clover B. DH denies tariff adjustment rule revives price competition. Health Service Journal, 25 November 2011.
2. Kmietowicz Z. Lansley writes price competition out of the health bill. BMJ 2011; 342:d1481
3. Gaynor M. What Do We Know About Competition and Quality in Health Care Markets? Working Paper no. 12301. Cambridge, MA: National Bureau of Economic Research, 2006.
4. The Nuffield Trust. Making markets work: A seminar on competition policy. London: The Nuffield Trust, 2011.
5. Propper C, Burgess S, Gossage D. Competition and Quality: Evidence from the NHS Internal Market 1991-1999. Bristol: University of Bristol, 2003.
6. Timmins N. Pro-market backers warn on NHS price plans. Financial Times 6 January 2011 (http://www.ft.com/cms/s/0/cbfa136a-19d4-11e0-b921-00144feab49a.html#axzz1TPb1aXCz) Accessed 03/08/2011)
7. The Nuffield Trust. NHS resources and reform: Response to the White Paper Equity and Excellence: Liberating the NHS, and the 2010 Spending Review. London: The Nuffield Trust, 2010.