The Hard Lessons and Harder Sell of Bringing Competition to Health Care Markets

Based on research of the National Health Service in England, increasing competition among hospitals improves outcomes without increasing costs, economist Martin Gaynor, PhD, reported at the Leonard Davis Institute of Health Economics 2010-2011 Research Series. In an interview, he also shared thoughts on increasing competition among non-hospital providers.

Dr. Gaynor presented his paper, “Death by Market Power: Reform, Competition and Patient Outcomes in the National Health Service,”1 in which he and colleagues quantified the impacts of market reforms the NHS implemented in 2006 on hospitals. “Lower market concentration is associated with higher quality without a commensurate increase in expenditure,” Dr. Gaynor said.

Dr. Gaynor is the E.J. Barone Professor of Economics and Public Policy at the H. John Heinz College at Carnegie Mellon University in Pittsburgh. Co-authors of the paper are Rodrigo Moreno-Serra of Imperial College London, and Carol Propper of Imperial College London and the University of Bristol in England. Their research was funded by the United Kingdom Department of Health.

Consumer Impact of Hospital Consolidation
The findings of that study fall in line with Dr. Gaynor’s other research on hospital delivery systems in the United States. “There’s quite a bit of research that points in the same direction, that competition among hospitals leads to lower prices,” he said in an interview. “That might not necessarily sound at first glance that that’s important for consumers, but what happens at the end of the day is that workers at companies with employer-provided health insurance pay for this, either directly through wage increases they don’t get, or reduced benefits, and in some cases employers are dropping health coverage entirely.
“So higher prices by hospitals due to monopoly power directly hurts the average U.S. citizen,” he added. Typically consumers don’t recognize this cost, which he described as “an indirect pass-through.”

In the United States, the pace of hospital consolidation, particularly in large urban areas, has accelerated, Dr. Gaynor said. “In the past 10 to 15 years there has been tremendous consolidation in the hospital sector, so much so that big cities that once had six to 12 independent hospitals now have two or three independent hospital systems or fewer,” he said. “We know that causes big problems with regard to reduced competition and higher prices. It is something we need to pay attention to.”
Concentration of hospital market power poses a challenge for the Affordable Care Act (ACA) to meet its overriding objective for controlling health care costs and improving quality, Dr. Gaynor explained. “There are going to be higher prices and lower quality,” he said. “That will only exacerbate these problems.”

Health Plan Consolidation
ACA does not have a complete strategy for dealing with costs specifically, but Dr. Gaynor acknowledged some economists have advocated for integration of health care providers to address costs and quality of care. There is much discussion in health policy circles about promoting the formation of accountable care organizations (ACOs), which would integrate various kinds of health care providers. 

He cautioned about the true benefits of consolidation among health care providers. “The notion is that integration of health care providers will increase efficiency, lower cost, improve quality of care. We can imagine how that might be the case, but there’s actually little evidence that this happens and there’s also a possible downside,” he said. “It could harm competition, possibly in ways that increase prices or reduce the quality of care. That’s the thing that we have to pay attention to going forward if consolidation of health care providers starts to be promoted as part of the implementation of the health care reform act.”

One cost control in ACA that Dr. Gaynor does not have much hope for is Medicare reductions in hospital and physician reimbursements. Scott Harrington, PhD, of the Wharton School noted that Richard Foster, chief actuary of Center for Medicare and Medicaid Services’ actuarial division, has reported that up to 30% of hospitals might find it difficult to survive with those cuts.

“We’re talking about a half billion dollars in cuts for all the markets, doctors and hospitals,” Dr. Gaynor said. “It’s a draconian measure that I think was put in to render the health care reform act budget neutral in order to get it through Congress. I honestly am dubious that these cuts will ever come about. Hospitals and doctors are going to protest mightily.”
That said, the act itself does not directly address health care costs, Dr. Gaynor noted. “The act is really designed to deal with coverage, and it sort of mentions health care costs in passing,” he said. “I actually don’t have a problem with that. I’d prefer to see the act more focused and deal with coverage in a very simple way and circle around to deal with costs.”

Leaning from the NHS
If Dr. Gaynor’s and colleagues’ latest work in England is any indication, there are lessons from the National Health Service for the U.S. health care system. The key elements of the NHS market reforms their research focused on were:

  • a “choose and book” mandate that physicians must offer patients a choice of five hospitals, whereas before the reform physicians had no direction to give patients a choice of hospital;
  • a “payment by results,” or PbR, movement toward fixed prices, similar to the diagnosis-related groups, or DRGs, that Medicare reimbursement rates are based on; and
  • rewards and penalties for performance, comprised of an elevated Foundation Trust Status for hospitals that meet performance goals, and management shakeups or, worse, closures for those that fail to measure up.

Theoretically, “choose and book” should increase the elasticity of demand, Dr. Gaynor said, while PbR should have caused hospitals to focus on quality since they could no longer use prices to compete for patients.

Dr. Gaynor and colleagues compared outcomes before and after reforms in seven measures. Their key findings included:

  • 2.4% reduction in 28-day post-heart attack in-hospital mortality in patients age 55 and older;
  • 3% reduction in 30-day post-heart attack mortality on or after discharge in patients age 35 to 72; and
  • smaller reductions—less than 1%—in both 28-day all-cause in-hospital mortality and 28-day in-hospital mortality excluding heart attack.

“After the reform, hospitals in more concentrated markets did worse with mortality than hospitals in less concentrated markets,” Dr. Gaynor said. “These results seem to indicate the policy worked as intended.”

 “So there’s an effect. It’s statistically significant. It’s not a trivial number, I would say, but it’s not a real big number either. One year after reform, you don’t expect a gigantic response.”

Dr. Gaynor and colleagues estimated the overall impact of the market reforms at 0.2% of the NHS’s $154 billion (₤100 billion). budget The reforms resulted in an estimated 3,354 life years saved, translated into dollar terms at $350 million (₤227 million).

Application in the United States
What can the United States learn from research into the NHS in England or single-payer systems in general? Dr. Gaynor cautioned against reading too much into the study. “Strictly and scientifically speaking, we can infer only about the set of circumstances in the institutions that we looked at, so the evidence we have points to the National Health Service in England only at the point of study in a very rigorous sense,” he said.

However, in a looser sense there is relevance to the U.S. health care delivery system. “The system in the United Kingdom is very different,” he said. “It doesn’t mean that competition in the United States would work the same way and have the same results. It does draw attention to the fact that it is something that may be important. It’s another country with a highly developed health system, so I think it tells us we should pay attention to this.

“We do find there that there were substantial improvements in health outcomes due to market competition and without the kind of provider integration, such as accountable care organizations, that’s being promoted here in the United States,” he continued. “This should make us think carefully about the paths we pursue to try to improve quality and reduce costs.”
Dr. Gaynor added, “There’s also evidence from the United States directly on the effect of competition on health outcomes for the Medicare population. It finds the same sort of things—that competition has salutatory effect on the health of Medicare beneficiaries.”

Physician Market Reform?
While Dr. Gaynor’s research has focused on hospital competition, he said the market power of physicians is worthy of attention in reforming the U.S. health care markets. “Entry to the medical profession is extremely limited,” he said. “The long-run average is that less than half of applicants to medical school get in, which to me is a strong signal that there is less than perfect competition by a long means. And what happens then of course is that not only do doctors earn more than they otherwise would, but that there’s less competition, prices are higher, and perhaps they’re not pushed to provide as high quality care as they otherwise might.”

He conceded that physician payment is a “third rail” for health policy makers. “My sense is that you’re not going to pass any kind of health reform if the American Medical Association opposes it, but at some point we’re going to have to confront this,” he said.

He noted the that Medicare has attempted to curb reimbursement rates to physicians, known as the Sustained Growth Rate (SGR), repeatedly in the past decade, only to have those reductions rolled back by Congress in the face of pressure from physician organizations. “It’s the right of physicians to lobby, that’s our political process, but that’s just not good for the country,” he said.

He proposed two strategies for reforms that would reduce the price of practitioner-provided health care: easing entry into medical school, and allowing nurses and other non-physician practitioners to provide more services.

“I fail to believe that every single one of the applicants who are not admitted to medical school would not be good doctors—some of them would not be, but many of them would be perfectly fine doctors. We can ease the entry of international medical graduates into the United States, again with some safeguards,” he said. “I think if we do these things we’ll find that there’s more care that’s better care and that it costs a whole lot less.


  1. Gaynor M, Moreno-Serra R, Propper C. Death by market power: reform, competition and patient outcomes In the British National Health Service. NBER Working Paper No. 16164. National Board of Economic Research, Cambridge, MA. July 2010. Available at http://www.nber.org/papers/w16164. Accessed October 29, 2010.
  2. Gaynor M, Vogt WB. Competition among hospitals. Rand Journal of Economics. 2003;34(4):764-785.
  3. Kessler DP, McClellan MB. Is Hospital competition socially wasteful? Quarterly Journal of Economics.2000;115:577‐615.
  4. Cooper Z, Gibbons S, Jones S, McGuire A. Does hospital competition save lives? Evidence from the English NHS patient choice reforms. LSE Health Working Paper 16/2010. London School of Economics and Political Science, London, UK. January 2010. Available at http://www2.lse.ac.uk/LSEHealthAndSocialCare/LSEHealth/pdf/Workingpapers/WP16.pdf. Accessed October 29, 2010.
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