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Incentivising competition in public services


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This presentation by Carol Propper was made at the workshop on Competition in Publicly Funded Markets (28 February 2019). Find out more at

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Incentivising competition in public services

  1. 1. Incentivising competition in public services Carol Propper OECD Workshop on competition in publicly funded markets, Paris February 2019
  2. 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 © Imperial College Business School
  3. 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 © Imperial College Business School
  4. 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 © Imperial College Business School
  5. 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) © Imperial College Business School
  6. 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 © Imperial College Business School
  7. 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 © Imperial College Business School
  8. 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) © Imperial College Business School
  9. 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 © Imperial College Business School
  10. 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) © Imperial College Business School
  11. 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 © Imperial College Business School
  12. 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 © Imperial College Business School
  13. 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. 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 © Imperial College Business School
  15. 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? © Imperial College Business School
  16. 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 © Imperial College Business School
  17. 17. THANK YOU © Imperial College Business School