Evidence that Lansley is wrong

Here's academic evidence that Lansley is totally wrong in his plans to change how hospitals are paid. Lansley's idea is that when you create a quasi- free market people will use the hospitals that give the best service and so quality goes up. Even a five year old will tell him that this is nonsense because (d'oh!) people much prefer to use their local hospital and so want that hospital improved. (Tony Blair got this idea at the beginning of his rule, but lost his way when his rich friends told him it would be better to use their private companies instead.)

Here is a blog post from Bristol University's Centre for Market and Public Organisation. OK, so the title first put me off "Healthcare competition saves lives" but the evidence is very interesting.

• It found that hospitals located in areas where patients have had more choice since the NHS reforms [the choice of any hospital in the NHS] had higher clinical quality – as measured by lower death rates following admissions – and shorter lengths of stay than hospitals located in less competitive areas.
• the hospitals in competitive markets did this without increasing total operating costs or shedding staff

There is a caveat: "One reason that the policy may be having this impact is the fact that prices are externally fixed." This is important because the hospitals were nominally not competing on price. In actual fact they were because two hospitals in the same area would be paid exactly the same amount for each procedure. But crucially, the Payment by Results payment system said that if a hospital provided the service for less than the fixed payment they could keep the surplus to be re-invested in the hospital (conversely, if a service generated a deficit then the hospital would have to cover it with surpluses from other services). A hospital generating large surpluses could provide more services, so there is an incentive to become more efficient. However, the fixed payment (or National Tariff) is calculated from the average cost of the procedure and so over time (as more hospitals get more efficient) the average will go down.

• Research for the UK showed that when competition was introduced in the early 1990s in a regime that allowed hospitals to negotiate prices as well as quality there was a fall in clinical quality in more competitive areas. Waiting lists, however, declined for these hospitals.

This is important because it says that if commissioners (the people who actually pay for NHS care) can negotiate on price then the quality will go down. This is exactly what Lansley is planning! He intends to replace Payment by Results (based on the average price) to a system where the price is "best practice " (ie the cheapest) and is the starting point for negotiation since commissioners will be able to negotiate down from this value. This is a return to the system in the early 90s and CMPO says: "Competition under fixed prices appears to have beneficial results whilst competition where hospitals bargain over price and quality do not". The conclusion is interesting:

If competition is to work, price regulation has to be retained.  A free-for-all in prices would mean a return to the “internal market” of the 1990s, a regime in which hospitals competed vigorously on waiting times and ignored aspects of quality that are more difficult to measure. In addition, the tendency of the UK government to merge failing hospitals needs to be looked at carefully. Mergers are popular with finance ministries in NHS type systems because they remove what is often seen as ‘excess capacity’. However, while there are gains from removing poor managers when a hospital fails, removing capacity by merger will limit the extent of competition and may stifle the impetus given by competitive forces to improve outcomes for patients.

Lansley does say that there will be a premium on the "best practice" price for quality. As the CMPO blog says "quality" is difficult to measure, so it is unlikely to affect hospital income.