Choice and competition in health care. Prof. Anthony Scott Melbourne Institute of Applied Economic and Social Research The University of Melbourne

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1 Choice and competition in health care Prof. Anthony Scott Melbourne Institute of Applied Economic and Social Research The University of Melbourne

2 Outline Background What conditions should exist for competition to work? Empirical evidence Is more competition the only answer? Implications for policy

3 Why choice and competition? Need for improved efficiency given severe fiscal pressures facing most health care systems Conservative governments around the world prefer market oriented solutions (US, UK, Australia) But cross country evidence suggests that health systems with more private finance are more costly and have lower levels of health

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6 Market failure in health care Market failure in health care (Arrow, 1963) Choice and information Uncertainty and insurance Externalities Other conditions/assumptions for markets to work well Enough providers Free entry and exit of providers Profit maximisation

7 Theory models of competition in health care How might competition work in health care given these market failures? What are the specific institutional features of health care that might influence whether competition works? Theoretical models (eg Brekke et al, 2014) also indicate that the following will influence whether competition works. Is competition on the basis of price or quality? Are consumers responsive to differences in quality? Is each additional patient is profitable (revenue minus cost)? To what extent are providers are altruistic? Can providers make and use profits and surpluses? Can providers choose which patients to see?

8 What might happen if competition is introduced? If some or all of these conditions don t hold, then more competition could: increase costs reduce quality and performance reduce access to care Pro-competitive reforms: should focus on changing the building blocks need careful design and evaluation

9 Policy interventions to increase competition Providers Improve info on relative performance and costs Involve private sector in finance and provision Patients Improve choice Improve info on quality Regulation of market structure Change number of providers Change entry and exit conditions Increased competition?

10 Example of policy change in UK NHS internal market ( ) Foundation Trusts (early 2000s) DRG payment from 2004 (fixed prices) Public reporting of quality of hospitals (2007) NHS Choices website Private sector allowed to treat NHS patients New private providers allowed to enter market Choose and book electronic booking service (2005) Patient choice policy (2007)

11 Patients: choice and quality Is patient choice influenced by quality? Do providers with higher quality have high demand? Brekke et al (2014) reviewed 12 studies of factors influencing choice of hospitals by patients (3 studies in UK NHS) higher quality leads to increased demand responsiveness of patients to quality is low Evidence that waiting times influence choice between public and private sector Who benefits from choice and information?

12 Patients: choice and information Does public reporting of performance information on providers ( report cards ) influence quality? Evidence mainly from US Higher published mortality rates reduce market shares Effects stronger in competitive areas Patients choice of health insurance plan (US) Historically very little choice of plan offered by employers Mixed theoretical and empircal results Too much information that is not understood? Obamacare??

13 Providers: information Does public reporting of quality influence provider behaviour? evidence of patient selection evidence that providers improve quality

14 Providers: involvement of private sector For profit health care providers Specialist hospitals Independent treatment centres Changes in ownership / regulation Public private partnerships Contracts to build and or run health care facilities Public hospitals contracting with private sector (eg to reduce waiting times)

15 Providers: private sector provision For Profit vs Not for Profit providers Differences in funding, objectives, use of surpluses Differences in types of patient (case mix) Differences in behaviour could be due a wide rage of factors For profit have stronger incentives to reduce costs Impact depends on patient selection and whether quality can be measured

16 Providers: private sector provision Quality and outcomes mixed evidence on quality differences, but for profit worse than private not for profit hospitals switching to become for profit increase mortality rates hospitals switching to govt or not for profit, no change in mortality Costs costs similar efficiency similar

17 Private sector: specialty hospitals Specialty hospitals, ambulatory surgical centres, independent treatment centres, retail ( walk-in ) clinics For profit Treat limited range of cases, eg cataracts or orthopaedics Issues US - owned by physicians Patient selection Higher volume so more efficient and better quality Adverse effects on other hospitals

18 Private sector: specialty hospitals Evidence from US Some evidence of lower or higher costs Some evidence outcomes are the same Select healthier patients and undertake more intensive procedures Some impact of mergers on general hospitals

19 Providers: public private partnerships Private finance of capital projects (PFI or PPP in NHS) Facility still owned by public sector, but many different models have emerged across countries build and maintain hospital, provide non-clinical services, provide clinical services, mix of above Lowers public sector borrowing May not reduce hospital expenditure private sector still requires a return on investment Incomplete contracts can t contract for everything

20 Market structure Does more competition increase quality? Hospitals With price competition US quality improves UK competition kills When prices are fixed US effects on quality unclear UK quality is increased Primary Care / Physicians Lower prices and quality unchanged.

21 Other ways to improve performance Not whether public or private but about appropriate incentives within each sector more financial autonomy for public providers budetary devolution / decentralisation harder budgets DRG payment physician payment P4P Value-Based Purchasing shared decision making integration, trust and long term contracts

22 Summary Need basic building blocks of competition information on outcomes / quality choice market structure incentives Choice and competition might work, under certain circumstances, but effects may be small Private not necessarily better than public Context matters

23 Conclusion Use economics to carefully design these markets Any policy changes should be carefully tested and evaluated using randomised trials