A false dichotomy: competition vs. integration in the NHS

In health policy, a good rule of thumb for distinguishing nonsense from arguments that deserve a hearing is to ask oneself whether one would accept the same logic in other sectors. This formula automatically filters out platitudes like ‘healthcare is too important to be left to the market’ (and food production is not important?), ‘but healthcare is a matter of life or death’ (and aircraft engineering is not?), ‘markets only work when we are perfectly informed about the product’ (and you are perfectly informed about how the software in your computer works?) or ‘it is immoral to make profit out of other people’s misery’ (like fire insurance?).

Yet the fashionable claim that competition in healthcare is destructive, because it undermines cooperation between health professionals, has a superficial attractiveness. Wouldn’t we be better served if healthcare providers worked with each other rather than against each other? Given that the management of complex chronic diseases, rather than one-off interventions, is becoming the greatest challenge in healthcare – is it not all the more important to encourage integrated care that cuts across clinical boundaries, rather than drawing new dividing lines? If so, the emphasis on competition would be the wrong focus at the wrong time.

However, this argument is based on a fundamental misunderstanding of what ‘competition’ means in an economic context (as opposed to, say, sports). Competition is not the opposite of integration. ‘Creating competition’ is not about fragmenting functioning working relationships and turning partners into adversaries.

Competition is, among other things, a process of discovering where the boundaries between different economic activities should lie. It is a process of testing whether a particular set of activities are best bundled and handled through close cooperation, or whether they are best split and handled by separate organisations. The way we find this out is by having specialised and integrated business models compete with one another. This process has no final stage, though, because the factors that favour one model over another – technologies, transaction costs, preferences etc. – are in a constant state of flux. This is why we constantly see specialised companies diversifying their operations, and broadly based companies narrowing down theirs.

For example, as recently as in the 1990s, package holidays were the predominant form of holiday travel. Through one single travel agency, people would book the transport service, the hotel, often full board, and sometimes even on-site activities like sightseeing tours. Nowadays, most of us book each of these components individually, because search costs have fallen so much. We can book almost everything online, and through websites like Tripadvisor we can readily gather information about the availability and quality of hotels, restaurants, local leisure activities etc.

The old industry structure was a response to conditions of high search costs and pronounced information asymmetries. Those conditions elicited an integrated structure, or rather, a particular kind of integration: close and often long-term contractual ties, but not actual mergers. Travel agencies did not own hotels or coaches, for example.

Once those conditions were no longer in place, the old industry structure no longer made much sense, and unravelled. Other sectors experienced the opposite trend: greater integration of previously separate organisations. The good thing about markets is that such adaptations take place swiftly and naturally, before we quite realise how and why. Adaptations in a market economy are of the now-that-you-mention-it variety.

The same mechanisms could work in healthcare. If it is true that the healthcare challenges of the future are best met through interdisciplinary cooperation, then in a competitive landscape, healthcare providers that achieve such cooperation would gain a competitive edge. A narrowly specialised provider that has a reputation for being good at what it does, but also for failing to work together with other specialties, would lose out. A provider that integrates complementary specialties would gain.

It is wrong to see competition as the opposite of integration. Rather, closer integration can be a result of competition, when close cooperation of synergistic specialties becomes a competitive advantage. And compared to forced integration through top-down restructuring, competition-induced integration would be more likely to be of the right kind. There is integration and there is integration. Do we need bigger hospitals with more specialities under one rooftop? Or does it make more sense for providers to intensify cooperation in selected areas, while otherwise retaining their organisational independence?

We don’t know. That is one of the joys of being an economist: you can take pride in emphasising how little you know, rather than being embarrassed by it. But what we do know is that others don’t know better either, and that competition is the way to find out.

Head of Political Economy

Dr Kristian Niemietz is the IEA's Editorial Director, and Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).

1 thought on “A false dichotomy: competition vs. integration in the NHS”

  1. Posted 17/04/2014 at 15:20 | Permalink

    I see you seek to belittle arguments opposing yours as ‘platitudes’ and ‘fashionable’. This is a rhetorical gimmick unworthy of the subject matter. Platitude’ or not, healthcare, in particular, is too important to be left to the whims of rapacious capital (you see, anyone can do it). This is not an argument about systems. This is a debate about motive and intention. If one is driven by a desire for personal gain then one’s fellow human beings are seen as nothing more than profit centres. The world provides multitudinous examples of how that plays out, eg, donkey meat in pies, inefficient energy oligopolies, exorbitantly priced rail services offering extremely poor service, etc. If one is hungry, to use your example above, one is capable of visiting various food outlets. If one is incapacitated through illness, accident or disease one is not in a position to shop around. The market does not and cannot work in a health economy. Stop this cant you spout.

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