Wednesday, 11 January 2012

Guest Blog: Competition in healthcare and the NHS

Dr Lucy Reynolds
London School Hygiene and Tropical Medicne
11 January 2012

Andrew Lansley has made clear since 2005 that he intends radical change to the NHS, and that that reform will centre on introducing competition throughout the service

This is because participation in a competitive market under competition and trade law can give private sector market participants legal rights to maintain that access on equal terms with all other providers, including private sector entities.  Such rights are enforceable in the UK and EU courts and through WTO arbitration. 
The legal position on this is not at all clear, but there is certainly doubt about the possibility of going back on an NHS privatisation should it turn out that the country is after all not keen on having its health services organised to maximise profits rather than to meet the medical needs of its people. This uncertainty has been acknowledged in the House of Commons by ex-McKinsey man David Bennett, who heads Monitor (see Commons Hansard 28 June 2011).

There are several reasons other than its possible irrevocability why the using markets to organise health care is a bad idea, and an expensive option also. 
1.       First, the assumptions underlying the market model really don’t fit at all well. These include:

Ø  No barriers to market entry or exit: but doctors need to be trained for years and hospitals need expensive facilities which aren’t easily converted to alternative uses.

Ø  Product homogeneity: but any clinician will tell you that for most conditions, there is great individual variation in the treatments needed for different patients, even those who have the same diagnosis.

Ø  No transaction costs, meaning no costs to provider or patient of getting to the point where a treatment is sold: but clearly either the patient must visit the doctor or vice versa, and the costs of consultations and diagnostic tests are well above zero.

Ø  Perfect information about the healthcare transaction between doctor and patient so that they can strike a fair price for the services purchased: but of course patients don’t go to medical school or receive clinical training in hospitals so they often have very little comprehension of what is wrong with them. A substantial minority of people in this country believe in homeopathy, crystal healing and suchlike: they lack even a basic grasp of the science underlying medicine, so how can they be considered to have enough understanding to know if the doctor’s prescription is the best thing for them or whether it is based on the best interests of the hospital’s profit and loss account?

The most problematic of all of these is the information asymmetry between buyer and seller, because the new system gives a direct financial incentive for health care providers to exploit their superior medical knowledge to over-provide and also to overcharge for what they provide. There is a copious research literature showing what happens in this situation, based on both theory and practice: if you pay providers fees for the treatments they give, and allow them to keep any profits (and force them to suffer any financial losses) then you get what’s called supplier-induced demand.  This means that the treatments given to a patient are more extensive than the patient’s medical condition warrants, and the charges per item also get pushed as high as the market will bear. Not only do patients get more treatment than they need (which can be dangerous after all – for instance there is a certain irreducible minimum of adverse reactions to anaesthetics, and these can be fatal), but the NHS budget will have to bear the cost of all this over-use and over-charging. And once patients understand that providers get paid more for over-treating them than for treating them correctly, the trust in doctors will be destroyed, leaving everyone worse off (except the litigators and the malpractice insurance companies!).
If any of these conditions are not fulfilled, the consequence is market failure. It is plain that markets in health care do not optimise health outcomes even in theory.  It is equally plain that practice mirrors theory on this: we have examples of market-based systems, such those in the USA, China, and much of the developing world which produce a mismatch between care needed and care provided.  We do not have any examples anywhere in the world of market-based healthcare systems which reliably produce healthcare which meets needs without wasting funds on overtreatment.

2.       The competitive market model requires that there always be a choice of provider offered.  The new NHS operating framework sets targets for the proportion of non-NHS providers, in order to provide this choice.  Since waiting lists were fairly stable and fairly short when this government took over the NHS, we can be confident that we already had about the right capacity to treat the number of unwell people in our population.  So these extra providers will be adding capacity: indeed this redundant capacity is a necessary correlate of the market model, if patients are always to be offered the required choice of at least three providers.  The NHS budget must, one way or another, cover the costs of having this redundant capacity provided only so that the market model may function.

3.       The competitive market model requires that every transaction involving a patient must be billed.  This results in a sizeable administration which is otherwise unnecessary.  The NHS budget will have to foot this bill too if the reform goes through.

4.       The Economist has recently pointed out a little remarked-upon correlate of competition, the need to advertise services so as to maximise market share.  Marketing is not cheap: the design of advertisements uses costly professionals, and the purchase of media space in which to showcase services is also expensive.  This expense will also soak up a sizeable share of the over-stretched NHS budget.

Being an NHS patient is not much like being a consumer: it’s an intrinsically different type of transaction.  Even being a private hospital patient paid for out of pocket is not much like buying consumer goods: someone with a serious illness does not have such a free choice of whether to spend money on treatment or some other goods or services, because actually the choice may be to buy the treatment or not buy anything at all, due to having deceased from the illness.  The consumer-based market model simply does not fit any but the most trivial health care services. 

On the other hand, there is no evidence whatsoever that competition in healthcare is beneficial.  Even the zealots admit that competition on price has negative effects on quality, and a medical negligence QC, John Whitting[1] pointed out last summer a specific way on which it causes quality to decline. He expects negligence cases to soar as a result of the roll-out of competitive commissioning:
“Even leaving aside the additional pressures on costs which apply uniquely to private healthcare organisations (the generation of profit and the payment of dividends to its shareholders), the need to undercut competitors in the NHS will inevitably impact on their primary item of expenditure: their staff. Fewer doctors and fewer nurses will have to work longer shifts: in other words, the very environment in which mistakes are most likely to happen......  These proposals are patently driven by commercial imperatives rather than by consideration of patient wellbeing.”

After a quarter of a century of unsubstantiated assertions that competition benefits quality in healthcare as long as it is not based on price competition, lobbyists finally, in 2010-11, found three UK-based studies which purport to test and prove this theory.  They are known as the Cooper et al paper and the Propper et al studies.
As these authors could not measure competition in the NHS per se they used the density of service provision as a proxy, comparing it with routine health service data on heart attack mortality. These three papers stand against a background of many other studies which do not find a positive association (as noted in a review of the literature in one of them) and in contrast to the theoretical case for why market-based competition in healthcare would be harmful, as set out by the Nobel Laureate Kenneth Arrow. While the three papers contain elaborate mathematical models corrected for many relevant confounding factors including distance to hospital, they suffer from a basic scientific error, the confusion of association and causation: they document the former and impute the latter. A small but perceptible difference in the outcomes before and after the introduction of small-scale competition mechanisms in the NHS is present, but the authors do not offer any convincing mechanism for how reduction of heart attack mortality might result from higher hospital density (which, as noted, they treat as a proxy for greater market competition between providers). Instead they postulate a general “halo” effect of greater operational efficiency arising from bidding for some types of work in the same hospitals that treat heart attacks, via a more “competitive” culture. Alternative explanations for the outcomes generated from the models they have devised exist, such as under-correction for the time taken for ambulances to drive heart attack patients to the nearest hospital. They also ignore the possibility of “upcoding”, although this exaggeration of the gravity of illness in incoming patients is a well-known consequence of paying hospitals according to the quantity and type of cases they treat, a change which is part of the competitive internal market introduced in the NHS. If hospitals are judged on mortality and outcome data there is an incentive to record medical problems as more severe than they are, a practice that is hard to detect even by tracking back to case notes. For this overlooked explanation both motive and mechanism are evident, and so is much precedent. Even if there is a true effect, these studies provide no evidence that it was competition that brought it about: it could as easily have been due to other changes taking place at the same time.
None of these three papers actually provide any evidence that the market competition reform proposed will in any way improve the NHS, and the fact that they are persistently cited as the best proof available (even after their over-claims have been exposed in the BMJ and the Lancet) tells its own story.

The reason this inappropriate arrangement is being forced on to the NHS is that some companies see profit opportunities in the change, for instance the German company Helios which has contracted to run 20 UK hospitals, the private equity-dominated Circle Health[2], or the management consultancies which are lined up to support CCGs by selling the organisation of the technical side of commissioning to them. 
For their benefit we are giving up a national health service which is among the leaders in the world for health outcomes and among the most cost-effective developed world systems (Commonwealth Fund every year with 7-10 developed countries, Pritchard & Wallace 17-country comparison Journal RSM 2011).
For their benefit, the government is proposing to arrange our healthcare so that a limited healthcare budget, under pressure from technological advances and an ageing population will be unnecessarily diverted in substantial part to (in no particular order):
-          Advertising agencies
-          Media outlets which carry advertising
-          Malpractice insurers
-          Shareholders
-          Retailers, wholesalers and producers of overprescribed pharmaceuticals and other products
-          Having hospital capacity lying idle
-          Unnecessary administration

There are three very pertinent alternative models of how services can be arranged without competition.  These are:
-          The arrangements in the UK NHS prior to the introduction of the internal market
-          The arrangements in the Scottish NHS since they removed the purchaser-provider split
-          The arrangements in the New Zealand national health system since they rolled back their internal market

Either would be viable, since both are home-grown and hence fully compatible with the NHS system.  The Scottish model has received very favourable reports, and is clearly cheaper than the English system now that competition-based allocation has brought extra providers into the system, many of which must pay a proportion of the money they receive for service provision over to their shareholders. The New Zealand model also appears successful according to independent evaluations.

In these cases, mechanisms internal to the system arrange for the different parts of the system to work in synergy, without the need for redundant capacity. This rational planning system can fairly closely match the services provided to the profile of need in the population, so it does not suffer from the problems of the 

Switching back to planning and away from markets in health care will certainly offend this government and the corporates that it has promised contracts to, but it can provide better value for money and a superior standard of care for the same budget. In these cost-conscious days, why is the government proposing to squander huge amounts of public money by reorganising the NHS in this much costlier and less effective way?

[2] Touted as “a John Lewis-style partnership”, this company is in fact majority owned by a group of three private equity companies which allegedly gave generously to Tory party funds, and is run by a formed merchant banker with Goldman Sachs.  Its clinicians have just under half the shares, but the management control is with the money men, because of its majority voting system, and the fact that all but one of the directors are financial services specialists without health care experience.


  1. Most cases involve registered medical practitioners, doctors and surgeons, but similar principles are applied to relating staff members such as dentists, midwives, nurses, physiotherapists, psychologists and psychiatrists.


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  3. Well Said, you have furnished the right information that will be useful to anyone at anytime. All these 4 points are very important in healthcare competition and in the NHS. Clive Peedell thank a lot for sharing such a healthy info with us. Keep up the great work.

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