Feature

Calculating the cost of competition

As clinical services head towards the open market, Stephen Bach examines the record of competitive tendering

Commercialism is at the heart of the government’s ambitious programme of reform for the NHS. But in the flurry of debate over self-governing hospitals — the most tangible aspect of this approach — attention has been diverted from the extension of competitive tendering to clinical services. This development is central to the provider market.

Competitive tendering is the primary mechanism by which contracts will be allocated. So it is worth looking at the experience of competitive tendering to date in the NHS, and to examine government claims about increased efficiency.

The attraction of competitive tendering to the government was the opportunity it presented to raise productivity in the NHS, open up new markets for the private sector and undermine the power of health service trade unions. For the government, the savings — calculated at almost £120m a year for the ancillary services — justified its belief that competition could substantially reduce expenditure.

But closer inspection of the government claims raises doubts about the appropriateness of introducing tendering into clinical services. First, there are inconsistencies in the way the savings-figures are compiled. The National Audit Office points out that some health authorities included the cost of early retirement and redundancies, while others did not.

The timing of the tendering exercise was also significant, as some authorities tendered for services only after raising productivity by investing in new equipment. The figures also ignore hidden cost, notably the increased management time spent in implementing the policy. This is not an isolated example. Similar reservation emerged from a detailed study of the government cost-improvement programme, which demonstrated that inadequate monitoring of what constituted cost improvement programmes had inflated the figures.

An improvement in efficiency implies an increased output from unchanged inputs. The corollary to financial savings, however, has frequently been a reduction in service standards — that is, reduced output. The Joint NHS Privatisation Research Unit documented 64 recorded failures by private contractors between September 1983 and May 1987. A recent study demonstrated the slide in domestic services standards under a private contractor, and their improvement when the service returned in-house. NHS managers acknowledge that service standards were allowed to fall too far in the quest for savings, and say that higher standards will be required in the second round of tendering.

A further challenge to government claims on efficiency comes from the observation that financial savings have been due to nursing staff carrying out work previously done by domestics, as a result to reduced domestic hours and the restriction of domestic work to cleaning duties. The irony is that with unfavourable demographic trends aggravating nurse recruitment and retention difficulties, management is increasingly emphasising the need to use scarce nursing skills efficiently by removing indirect patient case from their jobs.

Effective competition is central to the government’s vision of a market in clinical services. The ancillary services exercise, however, was dominated by a couple of multinational companies which won the majority of contracts, often through loss-leader bids. “Competitive” tendering for clinical services is likely to mean just as little true competition.

The whole planned development of the NHS, with a district general hospital serving a population of 250,000 people, militates against competition. The wave of mergers currently sweeping the NHS reinforces this. Recent mergers, like the establishment of Riverside and Parkside health authorities in London, show how services are increasingly concentrated on fewer and fewer sites.

The Department of Health itself has increasingly acknowledged that competition will be severely limited, particularly as the number of hospitals earmarked for self-governing status has dwindled. This has led to an admission that monopolistic and oligopolistic tendencies will need to be curbed by national guidance on prices.

The accurate measurement of costs is an integral aspect of successful trading arrangements to ensure stable price-competition emerges. The paucity of information available in the NHS will require massive investment in information technology equipment and staff, in order to get the billing system off the ground. These costs threaten to turn the NHS from a service with very low administration costs into one swamped by the processes of pricing services and then invoicing purchasers for those services.

In a system that will remain cash-limited this diversion of resources will be an extra financial strain. As with ancillary services, purchasers and providers may attempt to reduce costs. Providers may try to select less complex patients who require simpler procedures and shorter treatments. Hospitals may also attempt to shift the burden on to other agencies by discharging patients early.

In the absence of adequate outcome-measures that gauge clinical effectiveness, this kind of sharp practice will be hard to identify. The emphasis will be on accepting the lowest tender.

Despite government claims that the extension of competitive tendering will improve resource use for the benefit of all patients, the history of tendering is disturbing.

The irony is that the review was established in response to the financial crisis in the NHS. The government’s solution is to screw down costs through competitive tendering. The experience of the ancillary services should serve as a warning that this strategy will only weaken our ailing health service even further.