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Economics no image

Published on March 11th, 2012 | by Patrick Armshaw
Image © [caption id="" align="alignnone" width="564" caption="© Knox O (Wasi Daniju)"][/caption] The Health and Social Care Bill currently wending its way through the House of Lords has sparked considerable controversy, with opponents accusing the coalition government of destabilizing the NHS and even of preparing the ground for wholesale privatisation, and proponents (primarily the Conservatives and Health Secretary Andrew Lansely, arguing that the massive reform is necessary to make the NHS more efficient and affordable.  Politically, the bill appears to be toxic: the Bill is opposed by the British Medical Association, the Royal College of Paediatricians and Child Health and the Royal College of Radiologists among others, last month over 100,000 people signed an internet petition asking the government to abandon the push, Ed Milliband has argued that the Tories and LibDems are replaying the ‘Poll Tax’ debacle that ultimately brought down Margaret Thatcher, billboards opposing the bill have begun popping up in London (just in time for the mayoral race), and many in the governing parties have begun to question just how much damage this bill is likely to do to their electoral prospects.  While the bill is unpopular for any number of reasons, one of the biggest sticking points has been the drive to increase competition in the NHS – Lansely’s February op-ed in the Health Service Journal (registration required) focuses his defence of the bill squarely on this issue, while LibDem opposition in the House of Lords has similarly been directed against it.  Why is the coalition going to mat over increased competition in the NHS? Ultimately, this battle over competition can be seen as an ideological struggle between those who favour markets as a means of distributing social welfare (Conservatives, Market Liberals), and those who prefer that social welfare be provided by the state (Leftists and Left-Liberals).  But at the same time, those in favour of competition are not making an ideological argument – they argue instead that competition leads to efficiency and better outcomes.  The funny thing is, we can test these claims – we don’t have to leave it all up to ideology.  Does competition work, and will it work for healthcare? Let’s consider the theoretical case for competition.  If businesses compete for customers, then we should expect each business to lower its prices in order to beat the competition – resulting in lower prices for consumers and benefitting society.  This model of perfect competition works reasonably well to describe a lot of industries: toothpaste, kebabs and shoes spring to mind.  But perfect competition also requires a host of assumptions that are almost never met in the real world.  These include price-taking firms (if a business raises its prices then everyone stops shopping there), low barriers to entry (anyone can start a business and join the market), low transaction costs (making a sale is immediate and costs nothing), and (above all) perfect information – everyone has to know exactly how useful the thing they’re buying is, and how much it’s selling for everywhere else.  Oh, and one more – the stuff being sold has to be a private good, meaning no one else benefits and no one else is hurt when I buy or don’t buy the thing.  And while no market is perfect, toothpaste, kebabs and shoes are all close enough that markets are clearly the way to go. So is healthcare anything like toothpaste? Not even slightly.  In fact, the market for healthcare is the paradigmatic example of a good that should not be provided by the market.  In fact, none of the necessary assumptions for markets to work are present.  Doctors aren’t price takers – patients don’t coldly calculate comparative prices when it comes to getting their cancer treated, they just want not to die.  The barriers to entry for being a doctor are massive – medical school is neither cheap, quick, nor easy (thank God).  Transaction costs are large – how do you know whether you need a procedure until a bunch of expensive tests have been run? And information is about as imperfect as it can get – if the doctor tells you to get a procedure, you have no way (unless you are yourself a doctor) to know whether or not you really need it. And healthcare is full of externalities – just look at the sudden outbreak of measles in the US thanks to the spread of anti-vaccination beliefs among parents.  If healthcare is treated like a commodity, and doctors start trying to maximise their profits instead of our health, then we would expect high medical prices, erosion of trust among patients, over-prescription of procedures and medicine, and unequal access to care as the wealthy (who can afford to pay for anything they want) are given preference over the poor and middle classes.  And in fact, that’s exactly what we see in the US, where healthcare is treated like a commodity. So far, so horrifying.  But the NHS bill is not proposing privatisation, proponents say, and they are correct.  And surely competition doesn’t have to be purely market-based – what if instead of competing on profit maximisation, doctors and hospitals compete on outcomes? There has been some research lately that suggests there may be a role for competition among NHS hospitals, although this research stands in stark contrast to many findings over the last thirty years.  Researchers at the London School of Economics have found that heart attack patients are more likely to survive, and spend less time in hospital, in areas where there are more hospitals to choose from.  While the research does not show that people suffering heart attacks were generally the ones deciding where they would be treated, they argue that hospitals may have been driven by fear of losing patients into improving care.  They also found, however, that allowing private companies to compete with the NHS had the opposite effect – care deteriorated and access became more unequal as private hospitals ‘cherry picked’ healthier and wealthier cases , leaving the poor and sick to crowd the NHS and reduce their aggregate performance. The NHS bill is specifically geared towards increasing the amount of private competition with the NHS, allowing ‘any willing provider’ to enter the market - a prospect that must have US and international health companies salivating.  Even if we accept that competition, properly regulated and geared towards outcomes and not profit, would be beneficial, by forcing NHS hospitals to compete with private for-profit companies would prove corrosive and deadly.  The second problem is that competition is not self-sustaining.  To see why, consider what happens to those hospitals that cannot compete: they close down.  And as they do so, the very competition that might bring benefits is destroyed as the market becomes centralised.  And since private hospitals would be able to generate profit not through efficiency but by catering to the wealthy, while NHS hospitals found themselves cherry-picked to death, the end result could very well be privatisation, even if those supporting the bill do not want that to happen. The problems with the NHS bill are legion, but perhaps the most troublesome is the fact that Lansely and the coalition are engaged in a radical, far-reaching, and (despite their proclamations before the election to the contrary) very much top-down re-engineering of the NHS whose benefits are minor and entirely speculator, and whose dangers are real and manifest.  It is a good thing that opposition is mounting from all sides, and it’s probably true that the Tories and LibDems are facing electoral punishment if they go through with it.  The NHS is one of the great institutions of fairness and humanity in Great Britain, one that should make every one of us proud: if it must be altered, it should be done so respectfully, cautiously, and above all, fairly.  The Bill fails on all accounts.

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Competition and the NHS

© Knox O (Wasi Daniju)

The Health and Social Care Bill currently wending its way through the House of Lords has sparked considerable controversy, with opponents accusing the coalition government of destabilizing the NHS and even of preparing the ground for wholesale privatisation, and proponents (primarily the Conservatives and Health Secretary Andrew Lansely, arguing that the massive reform is necessary to make the NHS more efficient and affordable.  Politically, the bill appears to be toxic: the Bill is opposed by the British Medical Association, the Royal College of Paediatricians and Child Health and the Royal College of Radiologists among others, last month over 100,000 people signed an internet petition asking the government to abandon the push, Ed Milliband has argued that the Tories and LibDems are replaying the ‘Poll Tax’ debacle that ultimately brought down Margaret Thatcher, billboards opposing the bill have begun popping up in London (just in time for the mayoral race), and many in the governing parties have begun to question just how much damage this bill is likely to do to their electoral prospects.  While the bill is unpopular for any number of reasons, one of the biggest sticking points has been the drive to increase competition in the NHS – Lansely’s February op-ed in the Health Service Journal (registration required) focuses his defence of the bill squarely on this issue, while LibDem opposition in the House of Lords has similarly been directed against it.  Why is the coalition going to mat over increased competition in the NHS?

Ultimately, this battle over competition can be seen as an ideological struggle between those who favour markets as a means of distributing social welfare (Conservatives, Market Liberals), and those who prefer that social welfare be provided by the state (Leftists and Left-Liberals).  But at the same time, those in favour of competition are not making an ideological argument – they argue instead that competition leads to efficiency and better outcomes.  The funny thing is, we can test these claims – we don’t have to leave it all up to ideology.  Does competition work, and will it work for healthcare?

Let’s consider the theoretical case for competition.  If businesses compete for customers, then we should expect each business to lower its prices in order to beat the competition – resulting in lower prices for consumers and benefitting society.  This model of perfect competition works reasonably well to describe a lot of industries: toothpaste, kebabs and shoes spring to mind.  But perfect competition also requires a host of assumptions that are almost never met in the real world.  These include price-taking firms (if a business raises its prices then everyone stops shopping there), low barriers to entry (anyone can start a business and join the market), low transaction costs (making a sale is immediate and costs nothing), and (above all) perfect information – everyone has to know exactly how useful the thing they’re buying is, and how much it’s selling for everywhere else.  Oh, and one more – the stuff being sold has to be a private good, meaning no one else benefits and no one else is hurt when I buy or don’t buy the thing.  And while no market is perfect, toothpaste, kebabs and shoes are all close enough that markets are clearly the way to go.

So is healthcare anything like toothpaste? Not even slightly.  In fact, the market for healthcare is the paradigmatic example of a good that should not be provided by the market.  In fact, none of the necessary assumptions for markets to work are present.  Doctors aren’t price takers – patients don’t coldly calculate comparative prices when it comes to getting their cancer treated, they just want not to die.  The barriers to entry for being a doctor are massive – medical school is neither cheap, quick, nor easy (thank God).  Transaction costs are large – how do you know whether you need a procedure until a bunch of expensive tests have been run? And information is about as imperfect as it can get – if the doctor tells you to get a procedure, you have no way (unless you are yourself a doctor) to know whether or not you really need it. And healthcare is full of externalities – just look at the sudden outbreak of measles in the US thanks to the spread of anti-vaccination beliefs among parents.  If healthcare is treated like a commodity, and doctors start trying to maximise their profits instead of our health, then we would expect high medical prices, erosion of trust among patients, over-prescription of procedures and medicine, and unequal access to care as the wealthy (who can afford to pay for anything they want) are given preference over the poor and middle classes.  And in fact, that’s exactly what we see in the US, where healthcare is treated like a commodity.

So far, so horrifying.  But the NHS bill is not proposing privatisation, proponents say, and they are correct.  And surely competition doesn’t have to be purely market-based – what if instead of competing on profit maximisation, doctors and hospitals compete on outcomes? There has been some research lately that suggests there may be a role for competition among NHS hospitals, although this research stands in stark contrast to many findings over the last thirty years.  Researchers at the London School of Economics have found that heart attack patients are more likely to survive, and spend less time in hospital, in areas where there are more hospitals to choose from.  While the research does not show that people suffering heart attacks were generally the ones deciding where they would be treated, they argue that hospitals may have been driven by fear of losing patients into improving care.  They also found, however, that allowing private companies to compete with the NHS had the opposite effect – care deteriorated and access became more unequal as private hospitals ‘cherry picked’ healthier and wealthier cases , leaving the poor and sick to crowd the NHS and reduce their aggregate performance.

The NHS bill is specifically geared towards increasing the amount of private competition with the NHS, allowing ‘any willing provider’ to enter the market – a prospect that must have US and international health companies salivating.  Even if we accept that competition, properly regulated and geared towards outcomes and not profit, would be beneficial, by forcing NHS hospitals to compete with private for-profit companies would prove corrosive and deadly.  The second problem is that competition is not self-sustaining.  To see why, consider what happens to those hospitals that cannot compete: they close down.  And as they do so, the very competition that might bring benefits is destroyed as the market becomes centralised.  And since private hospitals would be able to generate profit not through efficiency but by catering to the wealthy, while NHS hospitals found themselves cherry-picked to death, the end result could very well be privatisation, even if those supporting the bill do not want that to happen.

The problems with the NHS bill are legion, but perhaps the most troublesome is the fact that Lansely and the coalition are engaged in a radical, far-reaching, and (despite their proclamations before the election to the contrary) very much top-down re-engineering of the NHS whose benefits are minor and entirely speculator, and whose dangers are real and manifest.  It is a good thing that opposition is mounting from all sides, and it’s probably true that the Tories and LibDems are facing electoral punishment if they go through with it.  The NHS is one of the great institutions of fairness and humanity in Great Britain, one that should make every one of us proud: if it must be altered, it should be done so respectfully, cautiously, and above all, fairly.  The Bill fails on all accounts.

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