This document summarizes evidence on incentivizing competition in public services like healthcare. It finds that separating healthcare provision from funding through insurance schemes can introduce competition but consolidation limits its effects. Prices set prospectively for hospitals may increase quality and activity. Limited evidence shows negotiated prices between insurers and providers can decrease quality. More autonomy and control over surpluses for providers is associated with better outcomes but regulations often erode such autonomy. Competition among family doctors with limited cost sharing can increase satisfaction and quality to a small degree. However, strong consolidation trends and heavy regulation limit meaningful competition in many European healthcare systems.

1. Incentivising competition in public
services
Carol Propper
OECD Workshop on competition in publicly funded markets, Paris
February 2019

2. Introduction
• Policy makers, particularly where public finance is
important, concerned about cost and productivity
• One approach is to promote competition
• Competition in rest of the economy argued to promote
growth
• Simple political appeal in heavily regulated public service
markets characterised by high levels of public spending,
low productivity growth and low levels of responsiveness to
users
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3. Introduction
• But consolidation in many markets, public and private, has
led to questions about functioning of markets in public
services
• Is competition useful: what has worked and what has
not?
• Consider various mechanisms including
• Autonomy for SOEs
• Use of targets
• Use of regulated prices
• As institutional details matters, use as case study attempts
to promote competition in European healthcare markets
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4. European healthcare suppliers
• At least two very different types of firm and market
• Hospitals
• Specialists and family doctors
• Other public service providers (schools, social service
providers) share features with one or other type
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5. Firms and markets
• Hospitals
• Large multiproduct firms
• Importance of distance means often a monopoly, nature of
specialist services (econs of scale) increases drive to
consolidation
• Widespread use of insurance (from state or employers)
means buyers are not typically the end user and direct
consumer choice generally limited either by insurance
and/or regulation (e.g. role of family docs as gatekeepers)
• Entry – possible into specific services, harder for full range
of services (efficient product line depends on econs of
scope)
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6. Firms and markets
• Family doctors/specialists
• Small, though have been increasing over time in response
to changes in production technology (leading to drives to
more treatment in the community setting)
• Entry easy though barriers from asymmetry of information
between consumers and suppliers
• Direct choice of consumer, though use of cost sharing is
high
• The features which drive monopoly provision are in part a
function of technology and also of government funding
and change over time
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7. Government tools to introduce competition
• Separation of provision from funding –
• Model widely used in European context
• Not necessary – another model is competition between
competing funder/providers HMOs
• Granting of control over production decisions for suppliers
• Prices of outputs
• Prices of inputs
• Distribution rules over profits/surpluses
• Autonomy from other regulations
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8. Evidence on use of these tools (hospitals)
• Separation of provision from funding
• Exists in almost all European contexts
• Social insurance systems use insurance (public or privately
owned), tax systems use direct funding of geographically
defined buyers
• Provision by SOEs and private sector (may or may not be
of different types)
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9. Issues in competition on the funding side
Tax systems generally no choice of ‘insurer’ for consumers
• No consumer pressure to make them more efficient or
responsive to local needs
• Local autonomy over what is purchased frequently
overruled by government regulation/intervention
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10. Issues in competition on the funding side
Social insurance
• Allows consumer choice (e.g. Netherland and Germany,
Switzerland)
• Use of risk adjustment to deal with adverse selection
(cream skimming) limits competition except in admin
costs
• Growing consolidation may also limit competition but
outcomes depends on healthcare supplier market
structure
• Limits to competition from government regulation on
choice of providers (e.g. Switzerland)
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11. Prices/contracts
Prospective (DRG type system) or negotiated contracts
between supplier and insurer
Under competition evidence that:
• Prospective prices increase quality (Norway, UK, USA) and
increase activity (UK, USA) and do not decrease equity (defined in
terms of access and distribution of outcomes)
• Effect on quality of negotiated contracts covering volume and
quality depends on relative elasticities of price and quality
• Evidence primarily from USA and UK (decrease quality but
increase volume)
• Little robust evidence from Netherlands and Germany
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12. Prices of inputs
• Frequently regulated, often at national level
• Evidence that national regulation decreases quality (health
and education) and this may be net welfare reducing
• Constraints on entry give providers rent – empirically
relatively little evidence of rent/welfare trade-off
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13. Autonomy over surpluses, inputs, production
• Generally part of reform packages for SOEs
• Often subsequently eroded, limiting scope for gains from
competition
• But evidence that managerial quality – shown in many
contexts to be positively associated with wide range of
hospital outcomes - is higher for hospitals located in more
competitive markets
• Specific target used in systems where demand > supply is
waiting times targets
• All targets have potentially unintended (negative)
consequences
• Evidence from UK that they reduce waiting times without
neg consquences for consumers © Imperial College Business School

14. Evidence for family doctors
• Evidence body smaller but active area of research
• Evidence from Sweden, Norway, UK that
• Structural demand studies show consumers trade-off
distance and clinical quality in primary (and secondary) care
settings
• Competition between family doctors under limited cost
sharing increases patient satisfaction and may increase
clinical quality, but increases are (in short run) small
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15. Issues in promotion of competition
• Market threats to competition
• Very strong trend to consolidation (e.g. Germany, UK and
Netherlands)
• Studies of mergers between providers in USA and UK
conclude prices rise and consumer benefits limited but an
area that needs much more research in Europe
• Heavy regulation of providers and widespread use of risk
adjustment limits competition on provision and insurance
side
• Need to think about using targeted subsidies and reducing
risk adjustment?
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16. Issues in promotion of competition
• Establishing a robust evidence base
• Difficult because multiple policies introduced at same time
• Data is not available (e.g. Netherlands)
• Can only establish effect of several policies turning on (or off)
• Existing research often cannot establish welfare gains
• Need for more structural estimation to take into account
both demand and supply factors to allow welfare
calculations
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17. THANK YOU
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