Hospital monitor

The Market and Health Care Production

Principal Investigator: Professor Carol Propper

Funder: Economic & Social Research Council

Duration: December 2012 – November 2016


This project intends to bring about a step change in our understanding of the operation of market forces in health care markets and to advance our understanding of the economics of health care production. Greater use of market mechanisms in health care is a key component of health care delivery reforms in many countries, so this project will consider the conditions under which a greater use of market mechanisms will be beneficial for the users and payors of health care services.

Key Research Questions

  • When and how does competition between suppliers of health care bring benefits to users of health care and tax payers?
  • What is the role of the health care labour market in health care production?
  • What is the interaction between intrinsic motivation, not for profit status and market incentives in health care?
  • When it is beneficial to use of market forces and high powered incentives in the delivery of public services?

Likely beneficiaries of this work are UK Department of Health in its policy making and service delivery role,  the newly created regulators and non health care regulators such as the OFT and the Competition Commission and international health care systems who have implemented or who are seeking to increase pro-market reforms.

Project Team: Carol Propper,  Katharina Janke (Lancaster) and Raffaella Sadun, (HBS) - We use English public hospitals as our research setting to investigate whether top managers can affect organizational performance in the public sector where these organisations not only finance, but also deliver public services. A long-standing government programme has given greater autonomy to public hospitals to make them less subject to political constraints and more in tune with the needs of the market, operated as free-standing organisations, earning revenue from contracts won in competition. As a result, hospital boards have the freedom to set senior manager pay levels which has grown in real terms over the last 15 year, far outstripping that of both senior clinicians and nurses. Using this data we examine which aspects of hopsital performance they affect, and track them across different hospitals over time - Status: Ongoing

Project Team: Carol Propper, Ramsis Croes (NZA), Yvonne Krabbe (VUW), Maarten Lindeboom (VUW) - In a series of reforms to the Dutch healthcare market, the government allowed hospitals and insurers to bargain over prices for common elective treatments. They also allowed the entry of private sector providers into this market. Using data on actual (as opposed to list prices) we examine the association between prices and market structure (the extent to which hospitals and insurers have monopoly power), the type of hospital (differentiating between teaching hospitals and more general hospitals) and the impact of  entry of private sector providers - Status: Ongoing

Project Team: Carol Propper, Hugh Gravelle (York), Dan Lui (York), Rita Santos (York) - In previous research we demonstrated that English patients choose their family doctors (known as General Practitioners) on the basis of clinical quality, as well as attributes including location, opening hours and gender.  While the English government seeks to increase competition in general practice provision, patient responsiveness to quality is a pre-requisite for this, leading to higher quality. Extending our earlier research, we now examine whether family doctors located in areas with numerous practices, increase their own clinical quality. Results so far suggest that this is the case, but primarily in areas where shortages of family doctors exist - Status: Ongoing

Project Team: Carol Propper - Why do firms adopt non-profit status? One argument is that this serves as a signal of quality when consumers are not well informed. We posit that an increase in consumer information may lead to a reduction in the number of non-profits in a market and we tested this idea empirically by exploiting an exogenous increase in consumer information in the US nursing home industry and found a reduction in the share of non-profit homes in the market, driven by a combination of home closure and sector switching. The lowest quality non-profits were the most likely to exit. These results have important implications for the effects of government reforms which seek to increase the amount of information provided directly to consumers in public services - Status: Paper Published

Project Team: Carol Propper - Greater patient choice was introduced in the early 2000s and at the same time GPs became independent of particular hospitals, the intention being to make referrals more responsive to hospital quality and in turn would increase hospitals’ incentives to improve quality. Contrary to most consumer goods markets, evaluating hospital quality is a non-trivial task, making it difficult for patients to pick the best hospital for a particular treatment. In this project we analyse whether referral patterns did become more responsive to quality after the introduction of the reform.We find that relatively better hospitals attracted a larger number of patients for heart bypass surgery post reform, and that patients became more sensitive to the quality of service as measured by patient survival. However the effect differs substantially across patient groups and reform had the strongest effect for patients most in need of high-quality treatment.

Project Team: Carol Propper, Nicholas Bloom (Stanford University), Stephan Seiler (Stanford University), John Van Reenen (LSE) - Throughout the world, the share of national income absorbed by healthcare seems to rise inexorably. Technological progress, rising citizen expectations and an ageing population have all helped to propel this escalation in costs. In an era of budgetary austerity, policy-makers have been searching desperately for ways to improve the efficiency of healthcare delivery without jeopardising the quality of clinical care. Nowhere is this greater than in hospitals, which are a major component of total healthcare costs. To an economist, a natural method of improving efficiency is through competition. In this work we look at acute care hospitals in the NHS to evaluate whether competition improves hospital quality and stimulates greater managerial effort. Overall, we find that hospitals that faced more competition had significantly better managerial practices and better clinical and financial performanc of a sizeable magnitude.  For example, we estimate that adding a rival hospital increases management quality by 0.4 standard deviations and increases survival rates from emergency heart attacks by 8.8%. Our work suggests that market structure should not be ignored.

Project Team: Carol Propper, Jack Britton (Institute for Fiscal Studies) - The impact of teacher pay on school productivity is a central concern for governments worldwide. But evidence on whether paying higher wages will increase school performance is mixed as schools may raise wages in response to poor school performance, giving a misleading impression that higher wages lead to poorer performance.  In this research we exploit the fact that teacher wages in England have largely been set externally to schools in national negotiations to examine the relationship between teacher pay and school output. We use data on over 3000 schools containing around 200,000 teachers who educate around half a million children per year. We find that teachers respond to pay. A ten percent fall in what teachers are paid relative to their counterparts outside teaching leads to an loss of around 2% in average school performance in the key exams taken at the end of compulsory schooling in England.

Project Team: Carol Propper, Simon Burgess (Bristol), Marisa Ratto (University Paris-Dauphine) and Emma Tominey (York) - In this research we looked at the use of incentive schemes, such as performance-related pay, in the British Labour government between 1997 and 2010. With budgets under pressure, governments around the world are trying to get more from fewer public sector workers – the perennial productivity issue - sometimes this is achieved through privatisation. Yet, less attention has been focused on the use of higher-powered incentives for the delivery of services that are closer to private sector administration – for example, the payment of welfare benefits or the collection of taxes. There are reasons to expect such schemes not to work as they include poor measurement of output and public sector motivation being driven out by the use of extrinsic incentives. We studied two schemes in the UK public sector, one for indirect tax collectors and another for those helping unemployed people find work. Results are mixed; we found under both schemes that relatively small bonuses did lead team members to increase their output, yet for in the tax group they achieved this by reallocating the more productive workers to incentivised tasks and away from the tasks that gave no rewards, rather than by greater effort of the members of the team.  So we find that cash incentives do matter, but that their design is critical. Well-designed schemes can work and may be more cost effective than a more general pay rise. The evidence also suggests that team-based rewards give opportunities for managers to achieve their targets by smarter assignment of their staff, and that the use of team-based pay in the public sector can, just as in the private sector induce free riding.

Outputs and Impact: