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Editor’s blog Monday 20 December 2010: NHS competition on price - will Monitor take SoS Lansley to judicial review?

The big one in the 2010-11 NHS Operating Framework is the announcement of competition on price, with tariff as a maximum.

The iridescent Professor John Appleby of the Kings Fund noted it in his rapid response guest editorial last Thursday. Appleby subsequently deadpanned, "I'd love to see the impact assessment on this one".

Zack Cooper, whose research with colleagues for LSE Health makes him one of the prominent students of competition in the NHS, and whose published work found that the effects of competition under a fixed-price system have been broadly positive, is fairly unenthusiastic.

Cooper told Health Service Journal's Crispin Dowler that "Every shred of evidence suggests that price competition in healthcare makes things worse, not better. “You save money, but as you’re lowering price you will lower quality ... “The moral of the story is not ‘more competition, good, less competition, bad’; it’s that you need to create sensible incentives and meaningful regulation in order to get competition that produces good quality”.

Coming from a proponent  of competition in the NHS, this is pretty serious.

HSJ also sought a counterveiling view from Nick Bosanquet, professor of health policy at Imperial College: “Without price competition there’s no incentive to lower costs and find more effective methods of doing the job. Just because we didn’t get it completely right in the 90s doesn’t mean we have to go on in the 21st century continuing to be frightened of using these things”.

HSJ also reported that Bosanquet suggested that should commissioners prove incapable of monitoring provider quality, then “they should be fired, and we should get somebody else”.

Even so prominent an advocate of more market-type NHS mechanisms as Reform's deputy director Nick Seddon is sceptical: "in the ideal, theoretical world of Porter and Teisberg, I'd like to see this become the case. In the real world, I'm not aware of any examples of health systems which have successfully moved to competition on price. There's a real lack of other competitive pressures and levers, or incentives for marketisation in the NHS".

A Propper mess?
The NHS evidence that Cooper and Bosanquet cite is the UK NHS studies of Carol Propper and colleagues, done for the University of Bristol, published in 1998.

Strikingly, a more recent study by Propper and colleagues, published this year, looking at the post-2006 NHS of the set tariff, found that "the effect of competition is to save lives without raising costs. Patients discharged from hospitals located in markets where competition was more feasible were less likely to die, had shorter length of stay and were treated at the same cost.".

Another study by Propper (with other colleagues), also this year and likewise looking at the post-2006 NHS of the set tariff, found that "higher competition (as indicated by a greater number of neighboring hospitals) is positively correlated with increased management quality, and this relationship strengthens when we instrument the number of local hospitals with local political competition".

Does price drive commissioner demand and patient choice?
First things first: what drives commissioner demand?

Is it price?

The answer to that depends how far in surplus or deficit your PCT is. The best evidence on patient choice from the influential Kings Fund research found that proximity is the major driver of patient choice. We can assume this is also true for referring GPs (deriving this assumption from the more than half of patients who reported not  being offered choice).

This is worth emphasising: GPs will start caring about price once they hold real budgets. Right now, that is virtually no GPs.

Even once they hold real budgets, there is a steady cadre of just over a quarter of GPs who have always opposed the policy of commissioning (as tracked by the DH's PBC surveys). These people are not going to become price-sensitive commissioners overnight on 1 April 2013, and all of them must be part of consortia. Or leave the NHS.

Choice appears to be more real in metropolitan areas, where it is realistically possible for patients and their visitors. Yet in much of the country, acute provision is a de facto geographical monopoly. Are these people's PCTs and GPs going to commission extensively on price? It would appear counter-intuitive. But the policy will permit them to do so if they want.

Why price competition?
Why would competition on price be a good idea, as opposed to a guaranteed race-to-the-bottom?

One answer would be that better care can be delivered more cheaply out of hospitals - but only if there is a reliable incentive created to create services that will meet diverted need.

Price negotiation would be a means to facilitate this. However. We do not know if this will work because it has not been piloted.

I will repeat that: we do not know whether this will work because it has not been piloted.

Another answer would be that it could be part of an explicit trade-off where quality was explicit and measurable (and God knows, that is scarcely the case now). In such cases, it could be possible for a commissioner to say to a patient, "you can see Dr Jones at the DGH in six weeks, or go to Dr Smith in Anytown FT Workers' Co-Operative In Association With APAX Private Equity - but the waiting time will be eighteen months".

Would GPs be happy with that? A minority might. Are there equity issues about patients' socio-economic and educational status impacting on their understanding of the risks and benefits? Mmmm - there just might be.

Another answer would be that the tariff is much too generous to hospitals for various models of care they provide. If this were true, we would except FTs to hold extremely large revenue surpluses. The latest figures from Monitor show that although FTs' "delivery of cost improvement plans ... is still behind plan (11%) ... this has not yet affected foundation trusts’ margins. NHS foundation trusts delivered an aggregate EBITDA (earnings before income tax, depreciation and amortisation) margin of 6.9% at quarter two, an increase from 6.7% at quarter one and ahead of the planned margin (6.7%). Aggregate income of £15 billion is also £181 million (1.2%) ahead of plan".

An aggregate income of 1.2% above budget does not suggest spectacular overpayment - but of course, the budget is based on the current assumptions of a fixed tariff.

It is the financial projections for 2011-12 with which we need to concern ourselves: what will price negotiation mean for FT revenue?

Who will be modelling this?

Monitor itself flagrantly cannot: that would be a 100% conflict of interest with its core function: to ensure maintenance of the financial viability of FTs. This policy risks threatening FTs' financial viability.

Monitor also has a duty to consider whether the policy will lead to bigger providers with deeper pockets trading their way out of trouble below cost to destroy weaker rivals. This would affect patient choice - another duty of Monitor's to obey.

So Monitor could legally challenge this policy, via a judicial review.

I wonder if SoS Lansey has been over-hasty in giving Monitor CE Steve Bundred the black spot?