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Paul Johnson & Matthew Bell: The reforms in perspective
1. Annual Health Strategy Summit
Paul Johnson, Director, Institute for Fiscal Studies
Matthew Bell, Associate Director, Frontier Economics
Twitter: #NTSummit
2. The reforms in perspective – lessons from
other industries
March
M h 2011
3. Healthcare is unique – but …
● Healthcare is:
□ large – apprx. £125 billion in government spending (2012)
□ complex – number services, difficulty observing quality
□ prominent – about 450 newspaper articles on NHS and legislation in last 6 months over 2 per
months,
day
● But:
□ UK has long experience of complex public sector, regulatory and competition reforms
□ across a range of sectors – none perfect match but considered together common lessons of
relevance do emerge
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4. Economic regulation – where, why and how
● Used in all the former public utilities:
□ Electricity, gas, water, telecoms, post, airports, rail
● Price and quality regulation focused on natural monopoly elements
□ Gas, electricity, water and rail networks, airport services, postal delivery
□ Electricity
El t i it generation, much of telecoms subject to lighter t
ti h ft l bj t t li ht touch h
● Core issues have been in
□ Collection f li bl i f
C ll ti of reliable information
ti
□ Balancing efficient level of cost and right quality
□ Price regulation as a means to promote efficient outcomes
□ When to use different forms of competition and how to think about horizontal and vertical
mergers
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5. Our paper examines the common lessons emerging
from telecoms, energy, water, post and transport
telecoms energy water
Each sector faces challenges in how it approaches the key areas of economic regulation.
Ensuring quality
E i lit
Fundamental regulatory challenge
● What are right metrics
Asymmetry of information
● What is right level
● How to achieve that
level
Competition regulation
● Horizontal mergers
□ Relevant market
□ Level of dominance
Price regulation
● Vertical mergers
● When is it needed:
□ Role of efficiency savings
□ Degree of competition
□ Impact on switching
□ Ability of consumers to decide
● What form should it take:
□ Price caps
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□ Rate of return
6. Common themes emerge
Fundamental regulatory challenge
Asymmetry of information
Expert advice Financial incentives Benchmarking
● Your experts ● Break link ● Various degrees of
versus mine: between cost and sophistication of
water, electricity revenue: price pure
● Cost modelling: caps benchmarking, all
bottom-up costing, ● Menu regulation: sectors
eg telecoms elec and water for ● Yardstick
● Customer opinion: capex competition
WTP ● Quality sticks and ● League tables
carrots
Rigorous pragmatism
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7. The themes resonate with the situation in healthcare
Information ● Monitor and Trusts, GPCs and Trusts, NCB and GPs
asymmetry ● Public, patients and clinicians
,p
Balance ● At the heart of the QIPP challenge – a reason it is
right price struggling?
and right
quality ● Economic incentives around quality – CQUIN, QOF
Competition ● Different types of competition
where
appropriate ● Role of designated services
Evidence ● Combine economics with strong understanding of
based institutional background
pragmatism ● Transition is important but not forever
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8. Many decisions to be made in healthcare reforms –
designated services sits at heart
● Designate a service if ceasing to provide it would:
□ Have a “significant adverse impact on the health of persons in need of the service”
□ Fail to prevent or ameliorate a “significant adverse impact”
● Application made by G Commissioner to Monitor
GP C
● Monitor must accept if it meets conditions, decision is appealable
● Designation must be reviewed at least once a decade
Designated services are protected from closure But not from competition
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9. Creation of designated services implies need to
separate them from non-designated services
non designated
Need to regulate designated and non-designated services separately
Accounting separation of designated and non-designated services
Right cost base?
● Which costs sit
where?
Quality incentives Competition Price regulation
● Future cost base –
● Designation linked ● Limits vertical ● How to set tariffs –
what investment is
to little real integration? potential for
needed?
competition (in the ● Would regulator efficiency savings?
● Transfer pricing? market) care about ● Is it desirable to
● Balance of carrot horizontal move services out
and sticks in mergers? of designation?
quality
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10. It is useful to think through the scenarios
All services in a
All A&E everywhere
(rural?) area are
is designated
designated.
Impact on quality and
cost of care
Adjoining GP
commissioning Most costly services
consortia designate are designed
different services
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11. Frontier Economics Limited in Europe is a member of the Frontier Economics network, which consists of separate companies
p p p
based in Europe (Brussels, Cologne, London and Madrid) and Australia (Melbourne & Sydney). The companies are
independently owned, and legal commitments entered into by any one company do not impose any obligations on other
companies in the network. All views expressed in this document are the views of Frontier Economics Limited.
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12. FRONTIER ECONOMICS EUROPE LTD.
BRUSSELS | COLOGNE | LONDON | MADRID
Frontier Economics Ltd, 71 High Holborn, London, WC1V 6DA
Tel. +44 (0)20 7031 7000 Fax. +44 (0)20 7031 7001 www.frontier-economics.com
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