Monday, 5 March 2012

On the benefits of competition in healthcare

I've borrowed the title from this post, which I reached  via Chris Dillow's "top blogging" list.  The post is enthusastic about the benefits of competition to the NHS.  But first, some background thoughts:

Few in the 21st century would deny that competitive markets are better at producing stuff people want than is state monopoly.  Ardent free-marketers assert that the same principle must apply to healthcare, but the logic is unclear to me.  For competition to keep prices down, consumers have to care how much they spend.  For competition to make products better, consumers have to be able to tell how good competing products are.  These factors may be present in healthcare choices, but that's far from guaranteed.  Competition can be expected to lead to better and cheaper refractive eye surgery.  It's helpful in controlling prices for breast augmentation, though regulation of the quality of the implants may be necessary.  But it's unlikely to do much for the emergency treatment of traumatic fractures.

The empirical evidence tends to confirm the difficulties.  Healthcare in the USA is competitive but egregiously expensive, and the high price does not lead to outstanding performance.  There are many reasons for this, but an important factor seems to be that consumers are spending little of their own money: insurance policies now include co-payments, but they tend to be fixed amounts that create little price competition between providers. And inflation in private medical insurance worldwide is well above general inflation, by comfortably more than the 2.5% pick-up sometimes quoted as steady state funding for the NHS.

On the other hand, Singapore has an effective healthcare system based on individual insurance, backed up by government price controls.  Family-level pooling gives patients motivation to control costs without obliging them to hold personal insurance for the whole liability.  This would be "a very difficult system to replicate".

Successive UK governments have introduced elements of competition into the NHS in the hope of restraining costs and raising quality.  My personal observations make me sceptical about this, but it's as well to look at what data is available.  And the article I cited at the start of this note claims to have evidence that competition is working its magic.  I'll examine some of the evidence in my next post on this.

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