Seminar on Choice and Competition in Public Service Markets - 9 September 2010

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Background

This seminar forms part of ongoing work by the OFT looking at public service markets and the regulation of competition in these markets. The aim of the seminar was to bring together leading academics, government officials, and industry representatives to discuss the effectiveness of market mechanisms and how best to design future regulation of public service markets.

The OFT commissioned Frontier Economics to explore the role of choice and competition in public services (see the press release, and papers below). The report drew lessons from experience in the UK and abroad of choice in public services. It presented these lessons as part of an overall framework that can help policy makers assess where and how competition and choice can be most effective, and how best to design systems that use market incentives to improve the performance of public services.

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Contact details for feedback questions

If you have any comments, feedback or questions regarding the seminar, please contact Veronica Mansilla (email veronica.mansilla@oft.gsi.gov.uk or call 020 7211 8330)

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On the role of choice and competition and evidence from public service markets

• Choice and competition can act as a mechanism for allocating scarce resources, drive efficiency and lead to better outcomes. Furthermore, choice may have intrinsic value.
• The effectiveness of choice and competition depends on a number of factors such as the nature of the service, demand side factors like awareness of choice and access to information as well as supply side factors like diversity in provision and flexibility in terms of entry, exit or expansion. Although most of the discussion revolved around competition in the market, it was acknowledged that competition for the market is also an important issue.

Choice and competition in education

• In schools, choice is well understood and actively used. There is a rich amount of information that parents can access in order to make informed choices. There is also a lot of diversity in the provision of UK schools. 
• At present regulation may act as a barrier for improving poorly performing schools and facilitating new entry. It is important that regulation takes account of new and emerging management structures. For example, regulating schools at an individual level may no longer be the best method of regulation when there are operators managing multiple schools. Government must also rethink the link between managing and building infrastructure.

Choice and competition in health

• In the case of health, relying on patient choice to improve hospital quality is weak. GPs are increasingly involved in helping patients choose, with GPs often using soft facts (location) rather than hard facts (clinical quality) to aid decision making.
• Evidence from both the UK and US show that competition leads to improved outcomes when prices are regulated. When prices are not regulated hospitals stop competing on quality of care and compete on more observable attributes. 
• However, price regulation also has its cost. When prices are regulated firms increasingly divert resources to rent seeking rather than satisfying their customers' needs. Some participants felt that price regulation was the second best tool, and should be a temporary measure. For example, utilities price regulation was meant to be temporary, and over time it was supposed to disappear. However, it is now a long-term tool. Price regulation places a lot of burden on the regulator as it must observe quality. The more complex the type of price regulation the more difficult it is to get right. 
• In the US there is increasing evidence to show that vertical integration of primary and secondary healthcare can lead to more efficient and patient focused outcomes.
• Future healthcare market reform in the UK may lead to an imbalance between GPs (buying healthcare services) and suppliers. This is because at their current scale GPs may not be able to exert sufficient buyer power over generally larger suppliers. These points led some to question whether vertical and horizontal mergers in the market should be allowed or encouraged and that maybe a wider evaluation of the optimal size of healthcare providers should be conducted.
• A key lesson from the evidence is that economic regulation including regulation of competition is important in this sector. Evidence shows that institutional structures and the incentives placed on suppliers can strongly influence market outcomes.

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On making markets more flexible and managing entry, exit and expansion

• For new entrants to be able to enter easily, markets need to be deep, rich and competitive. This can also help develop the capability of the supply base.
• Managing the exit of poor performing service providers needs to be done carefully as exit by a supplier should not lead to the loss of relevant skills. Exit strategies should punish poor providers but at the same time protect users. A deep, capable supplier base provides alternatives when underperforming suppliers exit.
• The Transfer of Undertakings Protection of Employment regulations (TUPE) is important - it can facilitate the entry of new providers by giving them access to skilled workers. 
• It may be the case that only the management team of a failing organisation needs to be changed.
• Contracts need to be designed appropriately to allow evaluation of performance, ensuring that the service provided closely corresponds with requirements. There may be a risk that simplicity of contracts, which have the goal of being clear and easy to monitor, could allow gaming by providers. In payment by results mechanisms, clarity is needed on exactly which outcomes should be measured. This is particularly true in joint commissioning by different Government Departments (co-commissioning) where the customer may use several services, for example probation services and employment support, and it is not clear which department is responsible for the outcomes. 
• Some degree of flexibility is needed to enable suppliers to function efficiently, but this needs to be balanced with the need for accountability. Some suppliers may appear inflexible; however this may be due to contractual arrangements and rigid labour markets.
• Some participants felt that Government needed to be clear on the type of market it wanted to develop - competing national chains or a diverse set of regional suppliers?

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On ensuring a level playing field in public service markets

• Providers find it difficult to participate in public sector procurement and commissioning processes due to the level of complexity. For example the bundling of services, information requirements and the way in which outcomes are measured can all act as barriers. Other barriers to a level playing field include differences in pension arrangements, tax rates, redundancy terms and risk aversion.
• Affordability for government is a key concern, especially in current times. There is a danger that tight limits on public spending may make competitive neutrality harder to achieve. There is also a tension between choice, well specified contracts, and equality of opportunity and outcome.

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Papers

• Download Choice and Competition in Public Service Markets - a guide for policy makers (OFT1214) (pdf 658kb)
• Download Choice and Competition in Public Service Markets - case studies OFT1214case) (pdf 1.34Mb)
• Download Competition in mixed markets: ensuring competitive neutrality (OFT1242) (pdf 560kb)

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Photos from the event

 

 

 

 

 

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