Paying for efficiency: what price the quality of hospital care? Alan Shiell Centre for Health Economics Research and Evaluation, Westmead Hospital Abstract: Economic recession prompts governments and health service ministers to seek increased efficiency in the production of hospital services in order to reconcile increasing demands with scarce resources. As one approach to the problem, the National Health Strategy is recommending pilot schemes, similar to those which have been introduced in both the United Kingdom and the Netherlands, which involve the separation of purchaser from the provider of hospital services. It is argued that such separation, with the introduction of competition between providers of hospital services for contracts placed by publicly funded Area Health Boards, will increase efficiency and accountability in the use of resources. However, this argument ignores the hospital management’s ability to keep costs down by altering the quality of hospital care in ways which are difficult to monitor by purchasing agencies. The article considers the effects the introduction of managed competition is likely to have on the quality of hospital services. The outcome is uncertain and competition may improve some dimensions of quality whilejeopardising others. If managed competition is tried in Australia, the opportunity should also be taken to examine its impact on the quality and outcomes of hospital care. (AustJ Public Health 1992; 16: 294-301) n times of economic recession, health ministers and Governments look to improvements in the efficiency of health service production to help reconcile increasing demands with scarce resources. In the United Kingdom the most recent reform of the National Health Service (NHS) has split the purchaser from the provider of health services and has opened up an internal market in the production of hospital care.’ In this system, a purchasing agent has statutory responsibility to ensure that care is available to a defined population and provides this care by mixture of direct provision and by contracting with other agencies. In the Netherlands, competition is being encouraged on both the finance and provider sides of the health care market.‘ Most recently, New Zealand, one of the first nations to introduce free health services, has announced plans to introduce pseudo-market mechanisms to improve costconsciousness and efficiency. What characterises the reforms in both the United Kingdom and the Netherlands is the introduction of managed competition among the providers of health care services (predominantly hospitals). The basis of this is that hospitals bid for contracts for specified clinical services with the funders of health care. In the United Kingdom, the funders are the District Health Authorities (DHAs), the boards of which are responsible for the health care of a defined population. These boards are charged with identifying the health needs of their catchment population and are assumed to be able to judge the quality and price differentials offered by the competing hospitals. In the Netherlands, a range of private financial intermediaries compete for the right to act as purchasing agent.
I
Correspondence to Mr Alan Shiell, CHERE, Department of Community Medicine, Westmead Hospital, Westmead, NSW 2 145
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Following this lead, the first issues paper produced by the National Health Strategy (chaired by Jenny Macklin) recommended greater use of market incentives to improve the efficiency of the Australian health care system and suggested the separation of funder from provider as one mechanism by which this might be achieved ( ~ . 4 9 )In . ~the second issues paper ‘Hospital Services in Australia’, the trial introduction of a purchaser-provider split is recommended as one possible method for improving the efficiency of hospital care (p. 15).4 The precise form that managed competition might take if it is introduced in Australia is yet to be determined but the experiences of the United Kingdom and the Netherlands provide alternative blueprints, while the mix of public and private provision which already characterises the Australian health care system provides a foundation upon which managed competition might be built. Scotton has described one possible system for Australia, which he suggests is a cross between the British and Dutch models, and which should be added to the range of options to be ~onsidered.~ As is indicated by the distinction drawn in the two NHS issues papers, it is important to distinguish the effects of a system of managed competition on the efficiency of the health care system more generally through its impact on purchasers, from the effects it has on hospital services, in particular through its impact on providers. Scotton’s interest in managed competition, and the main theme of Macklin’s first issues paper, is the effect on the health care system overall. Of concern in this paper, is the supply-side response from hospital providers to the introduction of managed Competition. Culyer describes the task of a provider to be ‘...cost effective at meeting whatever contractual demands
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are placed on it ...’.” Unfortunately the nature of the health care system is such that this task is not as simple as Culyer suggests and the drive for costefficiency may have detrimental effects on quality of care. The health care market in general, and the market for hospital services in particular, is different in critical ways from markets for other goods and services and even proponents of more competition agree that unfettered competition is undesirable.’ Uncertainty about the incidence of illness, its consequences and the effectiveness of treatment place the suppliers of health care in a powerful position to induce demand for their own services and increase demand for insurance which, as a consequence, minimises the incentives generated by prices. The question therefore, is whether pseudo-market mechanisms, such as managed competition, are any better than more administrative forms of organisation at achieving the objectives of health care systems and, in the context of this paper, at improving the efficiency of hospital services. The purpose of this paper is to consider the effects the introduction of managed competition is likely to have on the quality of hospital services. A brief description of the Dutch and British systems provides useful background. Then, the impact of competition on the quality of service provision both in theory and in practice is considered before conclusions for policy in Australia are drawn.
Managed competition: going British or Dutch? The essential distinction between the form of managed competition introduced in the Netherlands from that introduced in the United Kingdom lies in the relative plurality of health service provision in the two countries. This influences the comparative extent of competition among the purchasers of health services but does not affect the supply side. In the United Kingdom where the private sector is small in terms of both finance (insurance) and provision, the tax-financed nature of the NHS has been retained and individual contributions to health care finance are related to ability to pay. Population-based budgets are allocated to each District Health Authority (average population of 250 000) which has responsibility for identifying local health needs. The DHA then contracts for the provision of hospital services with public hospitals under the its own management, with public hospitals in neighbouring districts, with independent (self-governing) NHS hospital trusts or with private hospitals. The freedom given to hospitals which were previously directly managed to opt for self governing status as NHS trusts was one of the key reforms of the NHS and was the principal mechanism by which the split in responsibility of purchaser from provider was achieved. Self-governing trusts, although still technically part of the NHS, have greater freedom to set local terms and conditions for staff, to acquire and dispose of assets, to generate income and to provide health services through contracts with a wide range of providem8 The Netherlands is characterised by a more mixed economy of health service provision and finance in
which private insurance and private hospitals are more significant. This structure has been retained in the health care reforms and so a degree of competition exists among both purchasers and providers of services. A basic package or table of health service provision is funded from public monies to which contributions depend on ability to pay. Individuals receive vouchers which are risk-related and which they may use to purchase the basic table from a range of competing insurance agents. In addition, people may choose to top up their contributions if they wish to purchase more extensive insurance cover. The financial intermediaries agree to procure health services within the limits of the purchased table and may do so either by providing the services themselves or by contracting with hospitals and other providers.!’ The characteristic common to both systems, apart from the separation of purchaser from provider of hospital services is the introduction of contracts for hospital services. The income of the hospital depends on both its output (the number of patients treated or the number of contracts won) and its ability to control costs. This, in theory, provides the incentives needed to improve efficiency within the hospital sector. However, in addition to increased efficiency, costs can be controlled by reducing the quantity of care or its quality,’Oalthough the extent to which this will happen in practice is limited by professional standards and systems of quality assurance. The impact of competition on the quality of hospital services must be considered when assessing the merits of pseudo-market forms of hospital reimbursement. This raises problems of what is meant by the quality of hospital care and how much quality should one seek to provide. The highest quality need not be the most desirable if the costs of acquiring it exceed the benefits. Similarly, reduction in costs realised by reduction in the quality of hospital services is not efficient if the forgone quality is valued more highly than the cost savings.
The impact of competition As Macklin notes, competition among service providers may ‘occur on price, volume, quality and speed of access’ ( ~ . 2 5 )Unfortunately, .~ the effects of competition on these dimensions of care need not be in the direction intended, such as lower price, more appropriate volume, improved quality and better access. Joskow,observes that an important problem facing those who seek to design hospital reimbursement programs is that there is ‘no unique minimum cost for providing health care services when the intensity and quality of care can vary.’ He continues-‘Defining any particular reimbursement rate simultaneously defines the quality, intensity or amenity level of care provided.’I1 Joskow was writing about prospective reimbursement schemes where the price of care is set by diagnostic related group. Under such a system, hospitals cannot compete for patients on the basis of price and so must alter the level of amenity value or quality if they are to attract income. If regulated prices are set too high (higher than hospital costs), hospitals can compete on non-price dimensions such as decor or
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advertising to attract patients and/or doctors. This expenditure raises the costs of care up to limits set by the reimbursement rate. If the reimbursement rate is set too low (below hospital costs) then quality or amenity value can be reduced to keep costs within income. Setting the reimbursement rate at an average cost of all hospitals in an area may therefore have opposing effects on the quality of care as high-cost hospitals reduce quality to reduce costs and low-cost hospitals increase expenditure in an effort to improve amenity value and to attract patients. If prices are not fixed by the regulating body but contracts for clinical care are placed with hospitals submitting successful price tenders, then hospitals may still vary the quality or amenity value of the care they provide to keep within costs in ways which may not be efficient. The impact of contracting will therefore depend on the method of determining the reimbursement rate and the extent of competition experienced by each hospital. This gives rise to an apparent paradox where both improvements and reductions in the quality of care are regarded as effective competitive strategies. The key to this paradox lies in the meaning of quality when applied to hospital care and in the role of the physician as patient agent.
service providers who instead seek to manipulate the structure and process of care (the intermediate outputs) in order to achieve the desired results on health status. The health production process is uncertain because of ignorance of the underlying technical relationships between health-care inputs and patient outcomes, and differences in individual patient response to treatment. These add a stochastic element to the healing process which makes it difficult to observe some dimensions of the quality of care or to verify whether a particular clinical intervention has led to an observed effect. As a result, it is difficult for the purchaser or consumer of hospital services to ensure that care of the quality contracted for is actually delivered.I4 Hospital management therefore has two strategies available to it to respond to competitive pressures. It is free to improve the visible and verifiable elements of quality (such as decor and amenity value) if it seeks to attract custom while reducing the less observable and less verifiable elements (such as elements of clinical servicing) when it wishes to keep within budget. How this works and what it all means in practice depends on the nature of the relationships between hospital management, physicians and patients.
What is the nature of quality of care? In much of the economics literature which addresses the question of competition amongst hospitals, the definition of quality of care is obscure. Most studies fail to model quality explicitly and allow the residual in any statistical analysis to pick up the effects of inefficiency, stochastic error and any unmeasured variables including the quality of care. Noether suggests that quality of care includes ‘all non-price aspects of competition whether they have positive value or not.’” This definition is unsatisfactory. It includes in it aspects of service delivery such as greater bureaucracy and wasteful spending which are not usually regarded as quality care and it leaves the relationship between quality and value ambiguous. Thus, it is impossible to determine whether changes in cost resulting from an increase in competition are evidence of changes in efficiency or quality of care. If the effects of competition on the quality of care are to be disentangled, a more sophisticated definition is required. Donabedian’s tripartite definition of quality, distinguishing between structure, process and outcome, is not only more in keeping with clinical perspectives on the subject, it also recognises that quality of care is not unidimensional.’YThus, some aspects of quality may appeal more to some actors than to others and it is feasible that some dimensions of quality may improve at the same time as others decline. Donabedian’s definition also highlights the complexity of the relationship between clinical activity and quality of care. Whatever the value of improvements in hospital environment and amenities, the ultimate measure of quality of care is the outcome achieved by the treatment intervention, that is, final health status. This is not under the direct control of
The agency relationship The question here is who the hospital seeks to attract in its competitive strategy: the patient or the clinician? The distinction is important because what attracts one may not attract the other, unless the clinician acts as a perfect principal agent (acts solely in the best interests of the patient). In an imperfect agency relationship, a hospital’s best competitive strategy may be to attract physicians rather than patients for the former have admitting rights and can therefore determine a hospital’s income. Thus its ‘investments’ in improving amenity value are aimed at doctors’ car parking spaces, office refurbishment and high-tech equipment. If the hospital does compete directly for patients to any extent, expenditure on reception rooms, decor and hotel services may have a more immediate impact on income than say, staff training or improved clinical practices because of their more visible appeal. The question of who demands hospital care and what factors influence their decision is difficult to unravel. Pauly argues that the growth in managed care systems in the United States is educating consumers to make more informed choices of health care p r ~ v i d e rThe . ~ extent of private health care in Australia, though limited to a small segment of the health care market, means that patients may have some experience of choosing hospital specialists and this may be influenced by their knowledge of the hospitals to which the specialist has admitting rights but the extent to which choice is exercised and the basis for such choices is unclear. However, even in cases where the patient selects a hospital through his or her choice of specialist, the treatment he or she ultimately receives in that hospital (and therefore its quality) will be determined by the admitting physician. The agency relationship and
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physicianfiospital freedom to adjust the quality of care therefore cannot be entirely eradicated. The nature of the agency relationship is important when one considers the hospital's response to competitive pressures. First, the specialist becomes the obvious 'customer' for the hospital and so qualityimproving investments will be targeted towards the physician's utility function rather than that of the patient. Second, the hospital can use its greater economic power over the physician to prevent perfect agent behaviour thus allowing less observable or less verifiable dimensions of quality to be reduced to minimum standards acceptable to the medical profession in order to keep costs low. The actual extent to which underservicing will occur will depend on systems of quality assurance and professional peer review. These have the potential to act as a countervailing force on the otherwise unfettered impact of financial incentives, but as Renwick and Harvey report, the use of quality assurance mechanisms is not as widespread in Australia as elsewhere.I5 Formal models of physician behaviour under competition are reported by Pope and by Ellis and McCuire. Pope argues that in a competitive environment, non-price competition serves to drive up quality of care, so eliminating inefficiency and maximising quality subject to the reimbursement limit.16 However, Pope fails to recognise the different dimensions of quality and can only reach his conclusion by assuming that the physician acts as a perfect agent. This leads to inconsistencies in his model where spending on the clinician's office counts as improved quality of care while equivalent spending on the office of the hospital's chief executive amounts to management slack. Ellis and McCuire argue that if hospital profit (used solely as a proxy for the objectives of the hospital administration) enters the physician's utility function then too little treatment will be provided (that is, quality of care and the level of servicing is lower than optimal).17Perfect-agent behaviour by the physician is unlikely because of the relative power of hospitals as suppliers of critical complementary resources to physician services. Some support for this is provided by Schlesinger and colleagues who found that claims by physicians for a proportion of the surpluses earned by for-profit hospitals led to the prescription of more profitable rather than more cost-effective therapies.Is In the example studied, this meant that patients in end-stage renal failure were likely to receive renal dialysis rather than renal transplantation despite the wealth of evidence demonstrating the relative efficiency of transplantation. Such experience is not directly applicable to Australia but does show that the introduction of financial incentives has the capacity to influence clinical practice.
Summary of predicted effects of competition The introduction of competition is predicted to have two apparently contradictory effects on the quality of care. First, to attract income, hospitals will invest in visible structural and procedural changes, such as technology enhancements, primarily aimed at phys-
icians with admitting rights but also aimed to some extent at patients. The latter will improve amenities and satisfaction with the process of care (process utility) for the patient but at unmeasured opportunity cost and unknown impact on health outcome. Secondly, to keep costs down, hospital administrators will place pressure on clinicians to save on the less verifiable aspects of care (such as clinical services). Thus, utilisation reviews, second opinion surgery, restrictions on clinical prescribing and early discharge programs may be used as much to reduce the level of servicingand therefore its quality as to ensure more appropriate and more cost-effective care.
Research evidence Understandably, much of the research evidence on the effects of competition among hospitals is from the United States. Comparisons of the performance of hospitals under different ownership or managerial regimes in Australia have been reported but these studies d o not amount to an analysis of competition. I 9 The hospitals in such st.udies tend not to compete for contracts for cIinical.s&rvicesand the actual extent of competition .is never modelled. Some studies purporting to examine the effects of competition among hospitals are outlined in Table 1. The studies have been selected because each either contains some measure of the competitive environment in which the hospitals operate or is specifically concerned with the introduction of contracting for clinical care. This literature differs from the much more extensive research examining the effects of prospective payment or the operation of health maintenance organisations which tends not to consider the degree of competitive pressure. In studies examining cost-based reimbursement, higher costs have been found in areas of more intense competition.12,",21This result apparently confirms the prediction that hospitals either engage in nonprice competition or that competition leads to inefficient duplication of services. The lack of any measure of quality of care makes it impossible to distinguish between these opposing hypotheses. Furthermore, as the studies have all been cross-sectional, it is difficult to discern the direction of causation. It may be that some other factor is associated with both higher costs and greater concentration of hospitals. In this case, moving from a situation of little or no competition to one in which market forces are more apparent will not necessarily lead to increases in cost inflation. Hadley and Swartz examined the impact of both a prospective payment system based on diagnostic related groups and competition.22Prospective payment was associated with a large reduction in the rate of hospital cost inflation below the rate which would have prevailed under the previous historical cost based reimbursement system. Competition had little independent effect on costs though the extent of competition was not measured well. The authors candidly admitted that they did not know whether the observed reduction in costs was due to improved efficiency or reduced quality of care as quality of care was not measured in the study.
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Table 1: Effects of competition among hospitals Reimbursement regime
Meosure of competition
Study method
Period
Meosure of quolity
Robinson 8 luft20
Cost-based
Geographical distance
Crosssectionol
1972
Robinson 8 luft2'
Cost-based
Geographical distance
Crosssectional
I982
Noether'l
Cost-based
Herfindhol Index
Crosssectionol
1 977- 1978
Hadley 8 SwartP
PPS and competition
HMO membership, doctor to population ratio, % beds in forprofit hospitals
Pooled crosssectionol time series
FreundZ3
Selective contracting
Preferred orovider organisation IPPOI: fixed price contracts
Menneme er 8 01inge34
Selective controcting
PPO: fixed-price
8
Selective contracting
Selective contracting
Study
Zwanzi er Melnickgs
Robinson 8 PhibbsZ6
Results
Conc Ius ion
None
Competition associated with higher costs
Hospitols engoge in non-price competition
None
Competition associated with higher costs
As above, gap
None
Competition associated with higher costs but not prices
Engoge in price and non-price competition
1980-I984
None
PPS associated with largest reduction in cost inflation. Competition little effect, but poorly measured
Cost savings due to efficiency or reduced quality of core
Before and ofter
1982-1984. before ond one yeor ofter
None
Chonge in utilisation pattern, no change in comporotive costs
Equivalent savings by administration
Before and after
Before ond one week ofter
Tronsfers and 30-day mortolity
lower costs; higher throughput; no foll in quality
Contracts secured price concessions; utilisation review important
PPO: fixed-price contracts
Pooled crosssectionol time series
1980-1985
None
Competition associated with higher costs pre1983 and lower cost post-1983
Structurol change with introduction of contracts; l o n g term effects unknown
PPO: fixed-price
Cross-sectional; first differences
1982 and I986
None
Contracts Structurol change associoted with with introduction lower cost inflation of controcts
controcts
contracts
The introduction of selective contracting for Medicare beneficiaries in the United States more closely resembles the likely situation in Australia if managed competition were introduced. In this scheme, Medicare patients in California were channelled to hospitals that had successfully tendered for contracts. The basis of these contracts was a fixed payment per patient-day based on diagnostic related groups, set by the purchasing agency at a level slightly below expected Medicare costs under the previous fee per item payment. In all studies, the introduction of selective contracting was associated with a significant reduction in the rate of cost inflati~n.'~.'~:'~:'~ The quasi-experimental, before-and-after format adopted in most of these studies led the authors to conclude that selective contracting had been successful in lowering the rate of cost inflation. However, Freund tentatively concludes that parallel administrative changes in states without competition achieved cost savings of similar magnitude.'Y In all states, administrative review mechanisms were being introduced and refined at the same time as the changes in financing mechanism and so distinguishing the effects of each type of policy proved difficult. What is missing from many of these studies is any assessment of the quality of care as there are few studies which address this issue. Mennemeyer and Olinger used 30-day mortality and transfers out of 298
not getting wider
hospital as measures of quality and concluded that selective contracting was used to secure price concessions from established hospitals that provided good quality accessible care.24These results should be interpreted with caution. Less than 1.5per cent of patients died in hospital and less than one per cent of patients were transferred either before o r after the switch to selective contracting. The numbers of patients to which either of the quality indicators applies is therefore small. In addition, transfers were already tightly monitored before the introduction of contracting and would therefore not be expected to change very much. The opposite conclusion was reached by Shortell and Hughues" who found that hospitals in more competitive areas and those subject to more stringent rate regulation had substantially higher rates of mortality. In an impressive analysis of the effects of prospective reimbursement (though this is not explicitly competition), Kahn and colleagues assessed the quality of clinical practice and health outcomes before and after the introduction of prospective reimbursement by diagnostic related group.'8~29~.yo~y1~y2 Quality of care was measured by explicit process criteria and review of patient records, while patient outcome was measured in terms of stability of condition on discharge and mortality at both 30 days and 180 days after admission. Process measures of the quality of care continued
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to improve over the period, indicating that these dimensions of quality were not adversely affected by the change in reimbursement mechanism. Mortality was lower at discharge and at 30 days post-admission despite an increase in the severity of patients admitted after the introduction of a prospective payment system. However, the difference in mortality at 180 days was not significant at conventional levels. One outcome measure did deteriorate in that more patients were discharged from hospital to home in what was described as an unstable state. The discharge of greater numbers of patients in an unstable condition may or may not necessarily represent transfer to less costly/more cost-effective modes of care. This conclusion would depend on the preferences of patients, on the costs they incur and on differences in their quality of life experiences between the two modes of care. These important outcomes were not considered. Kahn’s work, which is a major study in this area, has three implications. First, the study demonstrates the feasibility of evaluating system-wide changes in terms of both costs and outcomes and so provides an example of how managed competition in Australia might be evaluated. Second, it shows the importance of tracing the effects of policy changes over the whole patient episode beyond discharge from hospital. Finally, it demonstrates that evaluations of quality o f care need to include measures of patient outcome such as health-related quality of life and patientchoice (which are more sophisticated than mortality rates) in order to assess the efficiency of policy change.
Lessons for Australia The increase in competition in the health care sector in the United States has been attributed to the need to contain health service costs which had grown to 11 per cent of gross domestic product (GDP) by 1990.33 The introduction of competition was then facilitated by the over-supply of doctors and the liberalisation of trade laws which allowed advertising for physician services. The situation in Australia is slightly different because capped expenditure in the hospital sector has successfully contained costs to less than 8 per cent of GDP over the past decade. According to the National Health Review, the problem faced by the Australian health care system is more one of complex financial arrangements which lead to gaps in and duplication of services, and to inappropriate incentives which encourage inefficiency and cost shifting.Y In theory, market mechanisms provide appropriate incentives to improve efficiency. In practice, the characteristics of health care mean that such mechanisms contain incentives which work with equal power to encourage cost and patient shifting and to prevent coordinated and continuous care. Cost and patient shifting need not be inefficient if it means patients are transferred to less costly, equally effective modes of care but, on the basis of evidence from the United States, the case for competition in this regard is unproven. The experience in the United States shows that to overcome market failures, competitive systems must
be accompanied by administrative measures such as utilisation review and quality assurance. However, it is not clear whether such measures are necessary adjuncts to competition (that is, essential complements) or whether they are possible substitutes for it. If quality assurance and utilisation review are substitutes for competition, they provide a possible alternative to reorganising the system which may be less costly but as effective in terms of meeting the objectives of health care reform. In Great Britain, Yates has shown that centrally funded initiatives to identify bottlenecks and redirect resources accordingly can be very successful in reducing waiting lists for acute care.y4 The key to the success of these initiatives was probably the prior introduction of reforms to the NHS management structure which established clearer lines of authority and short-term performance-related contracts for managers.Y5This suggests there may be scope to improve the efficiency and effectivenessof the Australian health care system with incentives without the need for wholesale reform.
Conclusions Managed competition in health care is an innovative response to problems faced by health care systems around the world. The combination of administrative control over resource allocation and total expenditure combined with market incentives to encourage productive efficiency is intuitively attractive. The proposal has the potential to increase the overall efficiency of the health care system because of the switch in budgetary power from providers of services to purchasing agencies. But the changes also instigate a supply-side response, and the introduction of a more imaginative and entrepreneurial way of thinking about the delivery of hospital services is not without costs or risks to patients. The benefits of these changes are also uncertain. If managed competition were a new clinical intervention, there would be loud and legitimate calls (from health economists in particular) to evaluate the measure before allowing its widespread dissemination. Even Alain Enthoven, arguably the architect of managed competition in the United States, Britain and the Netherlands, has expressed regret that the British Government did not experiment with its reforms before reorganising the whole system.Y6 The advocates of structural change to the health care system are no less subject to accepted ethical and professional standards of conduct as more conventional clinical pioneers and so proposals to alter the delivery of health care services should be subject to evaluation as much as any clinical innovation. The National Health Strategy’s recommendation that managed competition be considered as a possible option for reform is unsupported by any evidence of its cost-effectiveness and so the recognition that the proposal should be subject to pilot evaluation is welcomed. There are difficulties in evaluating system-wide changes but these do not constitute reason to avoid the problem. The Rand/UCLA study provides one possible method, involving an evaluation based on
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transitional implementation of the reforms. The existing state/territory divisions and the proposed introduction of Area Health Boards also make it feasible to experiment with structural reform. It would be possible to test the effects of managed competition plus administrative review versus administrative changes alone in different locations, using local experience before the change and contemporaneous experience in other States as controls. In both cases, the paucity of information on costs and outcomes and the lack of comparable data across States indicates the need for a preliminary period long enough to assimilate a minimum data set against which the effects of change can be assessed. Quality of care measures will need to reflect changes in structure, process and final outcome to differentiate the impact competition has on the different dimensions of quality. Both costs and quality of care will need to be linked and measured over the whole patient episode in order to pick up any cost or patient shifting. The research agenda is ambitious but then so too is the scope for reform. If there are any lessons to draw from experience in the United States of America they are that the effects of competition need not be as predicted by simple economic theory, and that it is possible, although not easy, to monitor the effects of macro-changes in structure and organisation on the efficiency and effectiveness of the health care system. Both lessons lead to one conclusion. If Australia does follow the lead of Great Britain and the Netherlands and tries managed competition as a means of improving the efficiency of hospital care then we have an excellent opportunity to avoid blindly following the blind by supporting the reforms with a credible evaluation strategy. Acknowledgments
The author gratefully acknowledges the contribution made to the development of this paper by Jane Hall and colleagues in CHERE, by members of the Australian Health Economists' Study Group and by two anonymous referees. The Centre for Health Economics Research and Evaluation is funded by the NSW Department of Health with additional support provided by the Western Sydney Area Health Service, the University of Sydney and Westmead Hospital. The usual disclaimers apply and all views expressed in this paper and any remaining errors are the sole responsibility of the author. References 1. Department of Health. Workingfor patients. Cm 555. London: HMSO, 1989. 2. Willingness to change. Rapport Bereidheid tot veradming. Advies van d e Commissie Structur en Financiering Gezondheidszorg, Staatsuitgeverij, Den Haag: 1987. 3. National Health Strategy. The Australian jigsaw: integration of health service delivey. Issues paper No 1. Canberra: DHHCS, 1991. 4. National Health Strategy. Hospital services in Australia. Issues paper No 2. Canberra: DHHCS, 1991. 5. Scotton RB. Demand side socialism and managed competition: Do they add up? Paper presented to the 13th Australian conference of health economists, Canberra, 1991.
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6. Culyer AJ. Demand side socialism and health care. Paper presented to Second World Congress of Health Economics, Zurich, 1989. 7. Pauly M. Is medical care different? Old questions, new answers. J Health Polit Poliq Law 1988; 13(2): 227-37. 8. Maynard A. Whither the National Health Service? In: Casparie AF, Hermans HEGM, Paelinck JHP, editors. Competitive Health Care in Europe. Aldershot: Dartmouth, 1990. 9. van d e Ven W. A future for competitive health care in the Netherlands. In: Casparie AF, Hermans HEGM, Paelinck JHP, editors. Competitive Health Care in Europe. Aldershot: Dartmouth, 1990. 10. Donaldson C, Gerard K. Minding our Ps and Qs? Financial incentives for efficient hospital behaviour. Health Policy 1991; 17: 51-76. 11. Joskow PL. Reimbursement policy, cost containment and non-price competition. J Health Econ 1983; 2: 167-74. 12. Noether M. Competition among hospitals. J Health Econ 1988; 7: 259-84. 13. Donabedian A. Evaluating the quality of medical care. Milbank Mem Fund Q 1966; 44 (2 Suppl): 166-206. 14. Farrell J. Shapiro C. Optimal contracts with lock-in. Am Econ Rev 1989; 79: 51-68. 15. Australian Institute of Health. Quality Assurance in Hospitals-Report of a survey. Canberra: AIH, 1989. 16. PoDe G. Hosuital nonorice comDetition and Medicare reimbuisement policy. J Health Econ'1989; 8: 147-72. 7. Ellis RP, McGuire TG. Provider behaviour under prospective reimbursement: cost sharing and supply. J Health Eon 1986; 5: 129-51. 8. Schlesinger M, Cleary PD, Blumenthal D. The ownership of health facilities and clinical decision making: the case of the ESRD industry. Med Care 1989; 27: 244-57. 9. Butler J. On the relative efficiency of public and private enterprises: some evidence from hospitals. In: Tatchell PM, editor. Economics and Health 1983. Proceedings of the 5th Australian Conference of Health Economists. Canberra: Health Economics Research Unit, Australain National University. 1984. 20. Robinson JC, Luft HS. The impact of hospital market structure on patient volume, average length of stay and the cost of care. J Health Econ 1985; 4: 333-56. 21. Robinson JC, Luft HS. Competition, regulation and hospital costs, 1982-1986. JAMA 1988; 260: 2676-81. 22. Hadley J, Swartz K. The impact on hospital costs between 1980 and 1984 of hospital rate regulation, competition and changes in health insurance coverage. I V i T 1989; 26: 35-47. 23. Freund D. Has public sector contracting with health maintenance organisations in the United States saved money? In: Selby Smith C, editor. Economics and Health 1 9 8 8 . Proceedings of the 10th Australian Conference of Health Economists PSMI. Melbourne: Monash University, 1988. 24. Mennemeyer ST, Olinger L. Selective contracting in California: its effect on hospital finances. Inquiv 1989; 26: 442-57. 25. ZwanzigerJ, Melnick GA. The effects of hospital competition and the Medicare PPS programme on hospital cost behaviour. CalifJ Health Econ 1988; 7: 301-20. 26. Robinson JC, Phibbs CS. An evaluation of Medicaid selective contracting. CalifJ Health Econ 1989; 8: 437-55. 27. Shortell SM, Hughues EFX. The effects of regulation, competition and ownership on mortality rates among hospital patients. New Engl J Med 1988; 318: 1100-7. 28. Kahn KL, Rubenstein LV, Draper D, Kosecoff J et al. The effects of the DRG-based prospective payment system on quality of care for hospitalised medicare patients: an introduction to the series. JAMA 264; 15: 1953-5. 29. Kahn KL, Rogers WH, Rubenstein LV, Sherwood MJ et al. Measuring quality of care with explicit process criteria before and after implementation of the DRG-based prospective payment system. JAMA 264; 15: 1969-73. 30. Kahn KL, Keeler EB, Sherwood MJ, Rogers WH et al. Comparing outcomes of care before and after implementation of the DRG-based prospective payment system. JAMA 264; 15: 1984-8.
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31. Rogers WH, Draper D, Kahn KL, Keeler EB et al. Quality of care before and after implementation of the DRG-based prospective payment system: a summary of effects. JAMA 264; 15: 1989-94. 32. Rubenstein LV, Kahn KL, Reinisch EJ, Sherwood MJ et al. Changes in quality of care for five diseases measured by implicit review, 1981-1986.JAMA 264; 15: 1974-9. 33. Scheffler RM, Nauenberg E. Health care financing reform in the United States during the 1980s: lessons for Great Britain.
In: McCuire A, Fenn P, Mayhew K, editors. Providing health care: the economics of altemutive ~ s t offinance m and delivery. Oxford: Oxford University Press, 1991. 34 Yates J . Why are we waiting. Oxford: Oxford University Press, 1987. 35. Griffitbs R. NHS Management Inquiy. London: DHSS, 1983. 36. Smith R. Words from the source: an interview with Alain Enthoven. BY Med J 1989; 298: 1166-8.
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Correspondence to Mr Alan Shiell, CHERE, Department of Community Medicine, Westmead Hospital, Westmead, NSW 2 145
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Following this lead, the first issues paper produced by the National Health Strategy (chaired by Jenny Macklin) recommended greater use of market incentives to improve the efficiency of the Australian health care system and suggested the separation of funder from provider as one mechanism by which this might be achieved ( ~ . 4 9 )In . ~the second issues paper ‘Hospital Services in Australia’, the trial introduction of a purchaser-provider split is recommended as one possible method for improving the efficiency of hospital care (p. 15).4 The precise form that managed competition might take if it is introduced in Australia is yet to be determined but the experiences of the United Kingdom and the Netherlands provide alternative blueprints, while the mix of public and private provision which already characterises the Australian health care system provides a foundation upon which managed competition might be built. Scotton has described one possible system for Australia, which he suggests is a cross between the British and Dutch models, and which should be added to the range of options to be ~onsidered.~ As is indicated by the distinction drawn in the two NHS issues papers, it is important to distinguish the effects of a system of managed competition on the efficiency of the health care system more generally through its impact on purchasers, from the effects it has on hospital services, in particular through its impact on providers. Scotton’s interest in managed competition, and the main theme of Macklin’s first issues paper, is the effect on the health care system overall. Of concern in this paper, is the supply-side response from hospital providers to the introduction of managed Competition. Culyer describes the task of a provider to be ‘...cost effective at meeting whatever contractual demands
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are placed on it ...’.” Unfortunately the nature of the health care system is such that this task is not as simple as Culyer suggests and the drive for costefficiency may have detrimental effects on quality of care. The health care market in general, and the market for hospital services in particular, is different in critical ways from markets for other goods and services and even proponents of more competition agree that unfettered competition is undesirable.’ Uncertainty about the incidence of illness, its consequences and the effectiveness of treatment place the suppliers of health care in a powerful position to induce demand for their own services and increase demand for insurance which, as a consequence, minimises the incentives generated by prices. The question therefore, is whether pseudo-market mechanisms, such as managed competition, are any better than more administrative forms of organisation at achieving the objectives of health care systems and, in the context of this paper, at improving the efficiency of hospital services. The purpose of this paper is to consider the effects the introduction of managed competition is likely to have on the quality of hospital services. A brief description of the Dutch and British systems provides useful background. Then, the impact of competition on the quality of service provision both in theory and in practice is considered before conclusions for policy in Australia are drawn.
Managed competition: going British or Dutch? The essential distinction between the form of managed competition introduced in the Netherlands from that introduced in the United Kingdom lies in the relative plurality of health service provision in the two countries. This influences the comparative extent of competition among the purchasers of health services but does not affect the supply side. In the United Kingdom where the private sector is small in terms of both finance (insurance) and provision, the tax-financed nature of the NHS has been retained and individual contributions to health care finance are related to ability to pay. Population-based budgets are allocated to each District Health Authority (average population of 250 000) which has responsibility for identifying local health needs. The DHA then contracts for the provision of hospital services with public hospitals under the its own management, with public hospitals in neighbouring districts, with independent (self-governing) NHS hospital trusts or with private hospitals. The freedom given to hospitals which were previously directly managed to opt for self governing status as NHS trusts was one of the key reforms of the NHS and was the principal mechanism by which the split in responsibility of purchaser from provider was achieved. Self-governing trusts, although still technically part of the NHS, have greater freedom to set local terms and conditions for staff, to acquire and dispose of assets, to generate income and to provide health services through contracts with a wide range of providem8 The Netherlands is characterised by a more mixed economy of health service provision and finance in
which private insurance and private hospitals are more significant. This structure has been retained in the health care reforms and so a degree of competition exists among both purchasers and providers of services. A basic package or table of health service provision is funded from public monies to which contributions depend on ability to pay. Individuals receive vouchers which are risk-related and which they may use to purchase the basic table from a range of competing insurance agents. In addition, people may choose to top up their contributions if they wish to purchase more extensive insurance cover. The financial intermediaries agree to procure health services within the limits of the purchased table and may do so either by providing the services themselves or by contracting with hospitals and other providers.!’ The characteristic common to both systems, apart from the separation of purchaser from provider of hospital services is the introduction of contracts for hospital services. The income of the hospital depends on both its output (the number of patients treated or the number of contracts won) and its ability to control costs. This, in theory, provides the incentives needed to improve efficiency within the hospital sector. However, in addition to increased efficiency, costs can be controlled by reducing the quantity of care or its quality,’Oalthough the extent to which this will happen in practice is limited by professional standards and systems of quality assurance. The impact of competition on the quality of hospital services must be considered when assessing the merits of pseudo-market forms of hospital reimbursement. This raises problems of what is meant by the quality of hospital care and how much quality should one seek to provide. The highest quality need not be the most desirable if the costs of acquiring it exceed the benefits. Similarly, reduction in costs realised by reduction in the quality of hospital services is not efficient if the forgone quality is valued more highly than the cost savings.
The impact of competition As Macklin notes, competition among service providers may ‘occur on price, volume, quality and speed of access’ ( ~ . 2 5 )Unfortunately, .~ the effects of competition on these dimensions of care need not be in the direction intended, such as lower price, more appropriate volume, improved quality and better access. Joskow,observes that an important problem facing those who seek to design hospital reimbursement programs is that there is ‘no unique minimum cost for providing health care services when the intensity and quality of care can vary.’ He continues-‘Defining any particular reimbursement rate simultaneously defines the quality, intensity or amenity level of care provided.’I1 Joskow was writing about prospective reimbursement schemes where the price of care is set by diagnostic related group. Under such a system, hospitals cannot compete for patients on the basis of price and so must alter the level of amenity value or quality if they are to attract income. If regulated prices are set too high (higher than hospital costs), hospitals can compete on non-price dimensions such as decor or
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advertising to attract patients and/or doctors. This expenditure raises the costs of care up to limits set by the reimbursement rate. If the reimbursement rate is set too low (below hospital costs) then quality or amenity value can be reduced to keep costs within income. Setting the reimbursement rate at an average cost of all hospitals in an area may therefore have opposing effects on the quality of care as high-cost hospitals reduce quality to reduce costs and low-cost hospitals increase expenditure in an effort to improve amenity value and to attract patients. If prices are not fixed by the regulating body but contracts for clinical care are placed with hospitals submitting successful price tenders, then hospitals may still vary the quality or amenity value of the care they provide to keep within costs in ways which may not be efficient. The impact of contracting will therefore depend on the method of determining the reimbursement rate and the extent of competition experienced by each hospital. This gives rise to an apparent paradox where both improvements and reductions in the quality of care are regarded as effective competitive strategies. The key to this paradox lies in the meaning of quality when applied to hospital care and in the role of the physician as patient agent.
service providers who instead seek to manipulate the structure and process of care (the intermediate outputs) in order to achieve the desired results on health status. The health production process is uncertain because of ignorance of the underlying technical relationships between health-care inputs and patient outcomes, and differences in individual patient response to treatment. These add a stochastic element to the healing process which makes it difficult to observe some dimensions of the quality of care or to verify whether a particular clinical intervention has led to an observed effect. As a result, it is difficult for the purchaser or consumer of hospital services to ensure that care of the quality contracted for is actually delivered.I4 Hospital management therefore has two strategies available to it to respond to competitive pressures. It is free to improve the visible and verifiable elements of quality (such as decor and amenity value) if it seeks to attract custom while reducing the less observable and less verifiable elements (such as elements of clinical servicing) when it wishes to keep within budget. How this works and what it all means in practice depends on the nature of the relationships between hospital management, physicians and patients.
What is the nature of quality of care? In much of the economics literature which addresses the question of competition amongst hospitals, the definition of quality of care is obscure. Most studies fail to model quality explicitly and allow the residual in any statistical analysis to pick up the effects of inefficiency, stochastic error and any unmeasured variables including the quality of care. Noether suggests that quality of care includes ‘all non-price aspects of competition whether they have positive value or not.’” This definition is unsatisfactory. It includes in it aspects of service delivery such as greater bureaucracy and wasteful spending which are not usually regarded as quality care and it leaves the relationship between quality and value ambiguous. Thus, it is impossible to determine whether changes in cost resulting from an increase in competition are evidence of changes in efficiency or quality of care. If the effects of competition on the quality of care are to be disentangled, a more sophisticated definition is required. Donabedian’s tripartite definition of quality, distinguishing between structure, process and outcome, is not only more in keeping with clinical perspectives on the subject, it also recognises that quality of care is not unidimensional.’YThus, some aspects of quality may appeal more to some actors than to others and it is feasible that some dimensions of quality may improve at the same time as others decline. Donabedian’s definition also highlights the complexity of the relationship between clinical activity and quality of care. Whatever the value of improvements in hospital environment and amenities, the ultimate measure of quality of care is the outcome achieved by the treatment intervention, that is, final health status. This is not under the direct control of
The agency relationship The question here is who the hospital seeks to attract in its competitive strategy: the patient or the clinician? The distinction is important because what attracts one may not attract the other, unless the clinician acts as a perfect principal agent (acts solely in the best interests of the patient). In an imperfect agency relationship, a hospital’s best competitive strategy may be to attract physicians rather than patients for the former have admitting rights and can therefore determine a hospital’s income. Thus its ‘investments’ in improving amenity value are aimed at doctors’ car parking spaces, office refurbishment and high-tech equipment. If the hospital does compete directly for patients to any extent, expenditure on reception rooms, decor and hotel services may have a more immediate impact on income than say, staff training or improved clinical practices because of their more visible appeal. The question of who demands hospital care and what factors influence their decision is difficult to unravel. Pauly argues that the growth in managed care systems in the United States is educating consumers to make more informed choices of health care p r ~ v i d e rThe . ~ extent of private health care in Australia, though limited to a small segment of the health care market, means that patients may have some experience of choosing hospital specialists and this may be influenced by their knowledge of the hospitals to which the specialist has admitting rights but the extent to which choice is exercised and the basis for such choices is unclear. However, even in cases where the patient selects a hospital through his or her choice of specialist, the treatment he or she ultimately receives in that hospital (and therefore its quality) will be determined by the admitting physician. The agency relationship and
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physicianfiospital freedom to adjust the quality of care therefore cannot be entirely eradicated. The nature of the agency relationship is important when one considers the hospital's response to competitive pressures. First, the specialist becomes the obvious 'customer' for the hospital and so qualityimproving investments will be targeted towards the physician's utility function rather than that of the patient. Second, the hospital can use its greater economic power over the physician to prevent perfect agent behaviour thus allowing less observable or less verifiable dimensions of quality to be reduced to minimum standards acceptable to the medical profession in order to keep costs low. The actual extent to which underservicing will occur will depend on systems of quality assurance and professional peer review. These have the potential to act as a countervailing force on the otherwise unfettered impact of financial incentives, but as Renwick and Harvey report, the use of quality assurance mechanisms is not as widespread in Australia as elsewhere.I5 Formal models of physician behaviour under competition are reported by Pope and by Ellis and McCuire. Pope argues that in a competitive environment, non-price competition serves to drive up quality of care, so eliminating inefficiency and maximising quality subject to the reimbursement limit.16 However, Pope fails to recognise the different dimensions of quality and can only reach his conclusion by assuming that the physician acts as a perfect agent. This leads to inconsistencies in his model where spending on the clinician's office counts as improved quality of care while equivalent spending on the office of the hospital's chief executive amounts to management slack. Ellis and McCuire argue that if hospital profit (used solely as a proxy for the objectives of the hospital administration) enters the physician's utility function then too little treatment will be provided (that is, quality of care and the level of servicing is lower than optimal).17Perfect-agent behaviour by the physician is unlikely because of the relative power of hospitals as suppliers of critical complementary resources to physician services. Some support for this is provided by Schlesinger and colleagues who found that claims by physicians for a proportion of the surpluses earned by for-profit hospitals led to the prescription of more profitable rather than more cost-effective therapies.Is In the example studied, this meant that patients in end-stage renal failure were likely to receive renal dialysis rather than renal transplantation despite the wealth of evidence demonstrating the relative efficiency of transplantation. Such experience is not directly applicable to Australia but does show that the introduction of financial incentives has the capacity to influence clinical practice.
Summary of predicted effects of competition The introduction of competition is predicted to have two apparently contradictory effects on the quality of care. First, to attract income, hospitals will invest in visible structural and procedural changes, such as technology enhancements, primarily aimed at phys-
icians with admitting rights but also aimed to some extent at patients. The latter will improve amenities and satisfaction with the process of care (process utility) for the patient but at unmeasured opportunity cost and unknown impact on health outcome. Secondly, to keep costs down, hospital administrators will place pressure on clinicians to save on the less verifiable aspects of care (such as clinical services). Thus, utilisation reviews, second opinion surgery, restrictions on clinical prescribing and early discharge programs may be used as much to reduce the level of servicingand therefore its quality as to ensure more appropriate and more cost-effective care.
Research evidence Understandably, much of the research evidence on the effects of competition among hospitals is from the United States. Comparisons of the performance of hospitals under different ownership or managerial regimes in Australia have been reported but these studies d o not amount to an analysis of competition. I 9 The hospitals in such st.udies tend not to compete for contracts for cIinical.s&rvicesand the actual extent of competition .is never modelled. Some studies purporting to examine the effects of competition among hospitals are outlined in Table 1. The studies have been selected because each either contains some measure of the competitive environment in which the hospitals operate or is specifically concerned with the introduction of contracting for clinical care. This literature differs from the much more extensive research examining the effects of prospective payment or the operation of health maintenance organisations which tends not to consider the degree of competitive pressure. In studies examining cost-based reimbursement, higher costs have been found in areas of more intense competition.12,",21This result apparently confirms the prediction that hospitals either engage in nonprice competition or that competition leads to inefficient duplication of services. The lack of any measure of quality of care makes it impossible to distinguish between these opposing hypotheses. Furthermore, as the studies have all been cross-sectional, it is difficult to discern the direction of causation. It may be that some other factor is associated with both higher costs and greater concentration of hospitals. In this case, moving from a situation of little or no competition to one in which market forces are more apparent will not necessarily lead to increases in cost inflation. Hadley and Swartz examined the impact of both a prospective payment system based on diagnostic related groups and competition.22Prospective payment was associated with a large reduction in the rate of hospital cost inflation below the rate which would have prevailed under the previous historical cost based reimbursement system. Competition had little independent effect on costs though the extent of competition was not measured well. The authors candidly admitted that they did not know whether the observed reduction in costs was due to improved efficiency or reduced quality of care as quality of care was not measured in the study.
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Table 1: Effects of competition among hospitals Reimbursement regime
Meosure of competition
Study method
Period
Meosure of quolity
Robinson 8 luft20
Cost-based
Geographical distance
Crosssectionol
1972
Robinson 8 luft2'
Cost-based
Geographical distance
Crosssectional
I982
Noether'l
Cost-based
Herfindhol Index
Crosssectionol
1 977- 1978
Hadley 8 SwartP
PPS and competition
HMO membership, doctor to population ratio, % beds in forprofit hospitals
Pooled crosssectionol time series
FreundZ3
Selective contracting
Preferred orovider organisation IPPOI: fixed price contracts
Menneme er 8 01inge34
Selective controcting
PPO: fixed-price
8
Selective contracting
Selective contracting
Study
Zwanzi er Melnickgs
Robinson 8 PhibbsZ6
Results
Conc Ius ion
None
Competition associated with higher costs
Hospitols engoge in non-price competition
None
Competition associated with higher costs
As above, gap
None
Competition associated with higher costs but not prices
Engoge in price and non-price competition
1980-I984
None
PPS associated with largest reduction in cost inflation. Competition little effect, but poorly measured
Cost savings due to efficiency or reduced quality of core
Before and ofter
1982-1984. before ond one yeor ofter
None
Chonge in utilisation pattern, no change in comporotive costs
Equivalent savings by administration
Before and after
Before ond one week ofter
Tronsfers and 30-day mortolity
lower costs; higher throughput; no foll in quality
Contracts secured price concessions; utilisation review important
PPO: fixed-price contracts
Pooled crosssectionol time series
1980-1985
None
Competition associated with higher costs pre1983 and lower cost post-1983
Structurol change with introduction of contracts; l o n g term effects unknown
PPO: fixed-price
Cross-sectional; first differences
1982 and I986
None
Contracts Structurol change associoted with with introduction lower cost inflation of controcts
controcts
contracts
The introduction of selective contracting for Medicare beneficiaries in the United States more closely resembles the likely situation in Australia if managed competition were introduced. In this scheme, Medicare patients in California were channelled to hospitals that had successfully tendered for contracts. The basis of these contracts was a fixed payment per patient-day based on diagnostic related groups, set by the purchasing agency at a level slightly below expected Medicare costs under the previous fee per item payment. In all studies, the introduction of selective contracting was associated with a significant reduction in the rate of cost inflati~n.'~.'~:'~:'~ The quasi-experimental, before-and-after format adopted in most of these studies led the authors to conclude that selective contracting had been successful in lowering the rate of cost inflation. However, Freund tentatively concludes that parallel administrative changes in states without competition achieved cost savings of similar magnitude.'Y In all states, administrative review mechanisms were being introduced and refined at the same time as the changes in financing mechanism and so distinguishing the effects of each type of policy proved difficult. What is missing from many of these studies is any assessment of the quality of care as there are few studies which address this issue. Mennemeyer and Olinger used 30-day mortality and transfers out of 298
not getting wider
hospital as measures of quality and concluded that selective contracting was used to secure price concessions from established hospitals that provided good quality accessible care.24These results should be interpreted with caution. Less than 1.5per cent of patients died in hospital and less than one per cent of patients were transferred either before o r after the switch to selective contracting. The numbers of patients to which either of the quality indicators applies is therefore small. In addition, transfers were already tightly monitored before the introduction of contracting and would therefore not be expected to change very much. The opposite conclusion was reached by Shortell and Hughues" who found that hospitals in more competitive areas and those subject to more stringent rate regulation had substantially higher rates of mortality. In an impressive analysis of the effects of prospective reimbursement (though this is not explicitly competition), Kahn and colleagues assessed the quality of clinical practice and health outcomes before and after the introduction of prospective reimbursement by diagnostic related group.'8~29~.yo~y1~y2 Quality of care was measured by explicit process criteria and review of patient records, while patient outcome was measured in terms of stability of condition on discharge and mortality at both 30 days and 180 days after admission. Process measures of the quality of care continued
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to improve over the period, indicating that these dimensions of quality were not adversely affected by the change in reimbursement mechanism. Mortality was lower at discharge and at 30 days post-admission despite an increase in the severity of patients admitted after the introduction of a prospective payment system. However, the difference in mortality at 180 days was not significant at conventional levels. One outcome measure did deteriorate in that more patients were discharged from hospital to home in what was described as an unstable state. The discharge of greater numbers of patients in an unstable condition may or may not necessarily represent transfer to less costly/more cost-effective modes of care. This conclusion would depend on the preferences of patients, on the costs they incur and on differences in their quality of life experiences between the two modes of care. These important outcomes were not considered. Kahn’s work, which is a major study in this area, has three implications. First, the study demonstrates the feasibility of evaluating system-wide changes in terms of both costs and outcomes and so provides an example of how managed competition in Australia might be evaluated. Second, it shows the importance of tracing the effects of policy changes over the whole patient episode beyond discharge from hospital. Finally, it demonstrates that evaluations of quality o f care need to include measures of patient outcome such as health-related quality of life and patientchoice (which are more sophisticated than mortality rates) in order to assess the efficiency of policy change.
Lessons for Australia The increase in competition in the health care sector in the United States has been attributed to the need to contain health service costs which had grown to 11 per cent of gross domestic product (GDP) by 1990.33 The introduction of competition was then facilitated by the over-supply of doctors and the liberalisation of trade laws which allowed advertising for physician services. The situation in Australia is slightly different because capped expenditure in the hospital sector has successfully contained costs to less than 8 per cent of GDP over the past decade. According to the National Health Review, the problem faced by the Australian health care system is more one of complex financial arrangements which lead to gaps in and duplication of services, and to inappropriate incentives which encourage inefficiency and cost shifting.Y In theory, market mechanisms provide appropriate incentives to improve efficiency. In practice, the characteristics of health care mean that such mechanisms contain incentives which work with equal power to encourage cost and patient shifting and to prevent coordinated and continuous care. Cost and patient shifting need not be inefficient if it means patients are transferred to less costly, equally effective modes of care but, on the basis of evidence from the United States, the case for competition in this regard is unproven. The experience in the United States shows that to overcome market failures, competitive systems must
be accompanied by administrative measures such as utilisation review and quality assurance. However, it is not clear whether such measures are necessary adjuncts to competition (that is, essential complements) or whether they are possible substitutes for it. If quality assurance and utilisation review are substitutes for competition, they provide a possible alternative to reorganising the system which may be less costly but as effective in terms of meeting the objectives of health care reform. In Great Britain, Yates has shown that centrally funded initiatives to identify bottlenecks and redirect resources accordingly can be very successful in reducing waiting lists for acute care.y4 The key to the success of these initiatives was probably the prior introduction of reforms to the NHS management structure which established clearer lines of authority and short-term performance-related contracts for managers.Y5This suggests there may be scope to improve the efficiency and effectivenessof the Australian health care system with incentives without the need for wholesale reform.
Conclusions Managed competition in health care is an innovative response to problems faced by health care systems around the world. The combination of administrative control over resource allocation and total expenditure combined with market incentives to encourage productive efficiency is intuitively attractive. The proposal has the potential to increase the overall efficiency of the health care system because of the switch in budgetary power from providers of services to purchasing agencies. But the changes also instigate a supply-side response, and the introduction of a more imaginative and entrepreneurial way of thinking about the delivery of hospital services is not without costs or risks to patients. The benefits of these changes are also uncertain. If managed competition were a new clinical intervention, there would be loud and legitimate calls (from health economists in particular) to evaluate the measure before allowing its widespread dissemination. Even Alain Enthoven, arguably the architect of managed competition in the United States, Britain and the Netherlands, has expressed regret that the British Government did not experiment with its reforms before reorganising the whole system.Y6 The advocates of structural change to the health care system are no less subject to accepted ethical and professional standards of conduct as more conventional clinical pioneers and so proposals to alter the delivery of health care services should be subject to evaluation as much as any clinical innovation. The National Health Strategy’s recommendation that managed competition be considered as a possible option for reform is unsupported by any evidence of its cost-effectiveness and so the recognition that the proposal should be subject to pilot evaluation is welcomed. There are difficulties in evaluating system-wide changes but these do not constitute reason to avoid the problem. The Rand/UCLA study provides one possible method, involving an evaluation based on
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transitional implementation of the reforms. The existing state/territory divisions and the proposed introduction of Area Health Boards also make it feasible to experiment with structural reform. It would be possible to test the effects of managed competition plus administrative review versus administrative changes alone in different locations, using local experience before the change and contemporaneous experience in other States as controls. In both cases, the paucity of information on costs and outcomes and the lack of comparable data across States indicates the need for a preliminary period long enough to assimilate a minimum data set against which the effects of change can be assessed. Quality of care measures will need to reflect changes in structure, process and final outcome to differentiate the impact competition has on the different dimensions of quality. Both costs and quality of care will need to be linked and measured over the whole patient episode in order to pick up any cost or patient shifting. The research agenda is ambitious but then so too is the scope for reform. If there are any lessons to draw from experience in the United States of America they are that the effects of competition need not be as predicted by simple economic theory, and that it is possible, although not easy, to monitor the effects of macro-changes in structure and organisation on the efficiency and effectiveness of the health care system. Both lessons lead to one conclusion. If Australia does follow the lead of Great Britain and the Netherlands and tries managed competition as a means of improving the efficiency of hospital care then we have an excellent opportunity to avoid blindly following the blind by supporting the reforms with a credible evaluation strategy. Acknowledgments
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