Undergoing even a relatively common hospital procedure — bypass surgery, say, or a hip replacement — is an exercise in trust. Patients want to believe that doctors are acting in their best interest, conferring expertise and compassion in the noble service of preserving their lives. Lying on the operating table, they are probably not thinking about how market forces have shaped the performance of their medical team.
They should be. A recent study co-authored by Nicholas Bloom and Stephan Seiler, professors at Stanford University, demonstrates that competition among hospitals significantly improves management and quality of care. “If you live in a remote area with only one hospital nearby, you should be worried,” says Bloom. “Without competition, what’s keeping it on its toes?” But if you live in the thick of town with a half-dozen hospitals nearby, “it means they’re competing for patients, and typically pretty good.”
That’s because competition has two key effects: It drives down prices, as Adam Smith proved long ago, and it makes people work harder and run their businesses more effectively. “Competition is good for reducing managerial laziness,” says Seiler. “If you’re competing with other hospitals, you actually have to be innovative and use good managerial practices.” That benefits consumers in the most profound way possible: “People live longer,” says Bloom.
The study, published earlier this year in the Review of Economic Studies, focuses on public hospitals in the United Kingdom, where the National Health Service (NHS) regulates prices and provides care for all, removing cost as a source of competition among hospitals.
“If you don’t have prices, then the only thing you can really compete on is quality,” says Seiler. The findings should apply not only to the many other nationalized health care systems around the world but also to heavily privatized markets like the United States, where the Affordable Care Act and veterans hospitals are making healthcare less and less “an industry fundamentally driven by profit maximization,” says Bloom.
To conduct the study, the researchers — who also included Carol Propper from Imperial College Business School and John Van Reenen from the London School of Economics — looked at counties in the United Kingdom featuring relatively large numbers of hospitals. Not coincidentally, these were also the counties with the most marginalized political constituencies; election records show that voters regularly punish any party whose government closes a hospital in their district, so regions where the three main parties are deeply embattled tend to have more hospitals than those where one carries a commanding majority. “Hospitals in the UK serve 50,000 to 100,000 patients each year, and a political constituency has about 70,000 voters,” explains Bloom. “So if you close a hospital, you upset a lot of people — enough to actually swing that constituency. The central government is totally aware of this: It’s suicidal.” Indeed, the data showed that districts where the ruling party won or lost by less than 5 percentage points featured 20% more hospitals than those where one party clearly dominated.
Hospitals that faced more competition scored higher in both effective management practices and patient outcomes. Adding a single rival improved a hospital’s management quality by 0.4 standard deviation from the mean, and increased heart attack survival rates by nearly 10%. Interviewers compiled management scores by conducting double-blind surveys of various hospital employees, rating their responses to such questions as, “How do you promote your employees?” and “Can you describe a patient’s journey or flow for a typical episode?”
For each standard deviation increase in management score, hospitals saw a 6.2% decline in the mortality rate of emergency heart attack patients. Higher management survey scores correlated to lower staff turnover, shorter patient lengths of stay, shorter waiting times for procedures, lower rates of drug-resistant staph infection, better financial performance, and higher composite scores from healthcare regulators.
Even so, promoting competition among hospitals has been a hard sell. “Critics argue that you are bringing evil market forces into something that should be about people, not profit,” says Bloom, who comes from a family of NHS doctors and who spent summers working for the NHS himself. “Most people, if asked ‘Is competition good for health care?’ would probably say, ‘No,’” he continues. “In Europe, it would be 90 to 10, really strongly against it.” One of his colleagues even got death threats for suggesting that competition would boost hospital performance.
Yet the policy implications are clear. “Governments should encourage market forces in health care, and health care plans should encourage consumers to shop around,” says Bloom. That means preventing big mergers and reducing regulation, which can stifle competition by creating cumbersome barriers to market entry. And trade unions and professional organizations need to be closely monitored, since their motives are often at odds with improved efficiency, says Bloom: “Their job is to protect their members’ interests; they’re not there to fight for the patients.” Consumers, for their part, need to keep pushing for choice and only go to hospitals that face competition.
Those rules hold true beyond health care. “It’s not just in retail but in every sector we’ve looked at: Markets and competition matter,” says Bloom. “They’re useful for improving incentives and providing services.”