Understanding Regulation

Facts, Analysis and Comment

Heath Services Regulation


There are many parallels between the provision of rail and health services in the UK. Most obviously, we now have government-run railway operated by the private sector in the form of franchised Train Operating Companies. And we have a government-run health service, again substantially provided by the private sector in the form of self-employed GPs, dentists etc, plus hospitals with a great degree of independence which compete with each other and can and do go out of business. Both sectors are subject to competition law which can lead to the competition authorities making decisions which conflict with government policy - for instance to grant rail franchises or to merge hospitals. The following notes explain why it is extraordinarily difficult to regulate these two sectors.

On the one hand, they both contain near-monopolies. The rail industry contains a number of natural or near natural monopolies, for there can usually be only one set of tracks between stations. The health service is (quite rightly) staffed by restricted-entry professionals, and specialist services need to be provided in a small number of regional centres. And most of us are reluctant and/or unable to change general practitioners (GPs). As a result, both sectors demonstrate lower than optimal productivity, and the quality of their service provision is often the subject of serious criticism. It is also the case that they are both heavily taxpayer funded. Successive governments have therefore been very keen to find ways of introducing competition into the sectors, so as to drive greater efficiency and improved service quality.

However, even putting their monopolistic characteristics on one side, it is clearly impossible to abolish subsidies and introduce unrestricted competition into either sector.

This would inevitably price-out poorer members of the community, imposing unacceptable social cost and - in the case of the rail system - doing huge economic damage to the economy of Greater London which depends so heavily on the rush hour commuter rail network. After all, any new transport infrastructure brings with it very large externalities (i.e. costs and benefits which accrue to third parties). In the case of rail, these are mainly beneficial, allowing new housing and commercial development, and increasing land prices. That is why it makes sense for the government to build roads and railways, and then subsidise their running costs, recouping the cost through general taxation.

There is also the point that effective regulation in any sector has to ensure that price competition does not leak through into unacceptably reduced service quality and/or a reduced range of services. But this is extremely hard to do in these sectors, for what is 'unacceptable'? In rail, where is the balance to be struck? It is extremely difficult (and probably impossible) to ascertain the extent to which rail passengers would be willing to trade reduced quality and reduced service frequency for lower fares. And then what about the rail safety/cost trade off? In health, it is surely near-impossible to measure 'quality', let alone ascertain what trade-offs would be acceptable.

Choice & Competition

Successive UK governments have stressed the importance of choice and competition in health services, so that patients can in effect drive up standards. But it is worth noting that the biggest gain from, for instance, getting surgeons to publish their success rates seems to have been that this encouraged them to learn from one another. Good practice and promising new techniques accordingly spread much more quickly than in the past. The result was that all surgeons' performance came up to near the standard of the best, and patients did not need to 'exercise choice' even though that was the original headline reason for the publication of the data.

Also, in contrast to rail, there has always been significant private sector health provision in the UK. To begin with, all GPs are self-employed, although their income is to some extent set by the Government, depending on the number of patients they can attract. And then many, if not most, consultants have a significant private practice delivered through their own consulting rooms, private hospitals and private wings within NHS hospitals. More recently, successive governments have encouraged NHS hospitals to become more self governing and competitive, beginning with the creation of Foundation Trusts in 2002, regulated mainly by Monitor with the Cooperation and Competition Panel ensuring fair play on the economic/competition front, and the Care Quality Commission and all the Professional Bodies monitoring the quality of care provided by doctors, nurses and other professional staff. It may or may not have helped that the Cooperation and Competition Panel was in due course subsumed into Monitor.

The post-2010 Coalition Government indicated that it intended to extend Foundation status to all hospitals, and has abolished Strategic Health Authorities and Primary Care Trusts: the organisations previously charged with coordinating NHS services in their areas. This has left consortia of GPs in effect buying services direct from hospitals - thus somewhat ironically reducing competition to the extent that individual GPs will in future be bound to send their patients to those hospitals with which their consortia have negotiated favourable contracts, rather than to a particular consultant whom they particularly admired.

But What About Quality?

As noted in the introduction, there is a huge danger that price competition can lead to providers cutting corners (or worse) when considering the quality, range and service aspects of their offering. This needs to be controlled by sensible regulation but the UK regulatory regime has suffered some serious failures, most obviously at Mid-Staffs and Morecambe Bay

Blogger Guido Fawkes was not impressed by what he saw as a regulatory quagmire, nor the October 2013 Chair-designate of Monitor:-

"It's hard to summon the invective to describe the nice young regulator who's going to head up the NHS's Monitor. Pleasant, modest Dominic Dunn (£63,000 a year for three days a week) is there to provide another layer of strategic obfuscation in the multi-billion miasma of the NHS. That's not written in to his job description but he is certainly an elusive target. When asked a direct question - is it your job to promote competition in the NHS? - he answered: "Not to promote competition, but to address anti-competitive behaviour." Or again: "We don't have enough radiotherapy in my part of the country. Is it your job to address that lack?" He said: "I certainly agree with avoiding the situation where there is enforcement action needed." When the revolution comes, these people will be carrying bedpans.

[Parliamentary committee Chairman] Stephen Dorrell asked Mr Dunn what he'd like to be remembered for after a decade running the joint. "Well, er I this it's knowing how you define success." Oh yes. Defining success, that's the key to it. These people do what they do and call it success. But judging from the administrative esperanto he spoke, success won't be getting nurses to wash their hands. It won't be stopping staff telling old people to "go in their beds" instead of taking them to the toilet. Success won't be rooting out hospital heads responsible for deaths by incompetence, negligence and sadistically indifferent staff. No, success will be aligning the strategic priorities and navigating the transitional issues between national integration and intrasectoral competition.


The availability of (usually free to patients) of health treatments is controlled by NICE - the National Institute for Health and Clinical Excellence. (The need for this independent regulator is discussed here.)

Even so, there was an interesting report, in February 2015, of a York University-led study which suggested that (albeit in response to patient pressure) the cost of newly regulator-approved and often very expensive drugs was literally killing other patients as NHS resources were diverted away from areas such as radiotherapy, nursing and mental health.  According to a Times report of the study, "Approving a drug that costs the health service £10 million will lead to 51 extra deaths elsewhere as well as worse quality of life for many other patients." And "The Cancer Drugs Fund costs other patients five years of good quality life for every one year it adds." 

There has only been one recent political interference in the regulatory process when the Conservatives promised to set up a Cancer Drugs Fund during the 2010 election campaign amid concern patients were not always getting access to the latest drugs. But a 2017 academic report found that the fund in England had been a "huge waste of money" and may have caused patients to suffer unnecessarily from the side effects of the drugs. Nearly 100,000 patients received drugs under the scheme which ran from 2010 to 2016 and cost £1.27bn but researchers found only one in five of the treatments was of benefit.

International Comparisons

As an aside, we all know that the provision of health care in the USA is the subject of even more highly charged political debate than in the UK, although it too is provided by a complex mixture of publicly and privately funded organisations. The Patient Protection and Affordable Care Act (Obamacare) came into effect in October 2013 and aims to cover 32m uninsured people and ensure coverage of those with pre-existing conditions. From a competition economist's point of view, it should improve labour market flexibility. Previously, most working people got insurance through their employers and this complicates decisions about leaving a job, particularly for people with long-lasting medical conditions. One commentator called it a form of serfdom.

At the macro level, too, the US health system is very inefficient compared with those of other large high-income countries. The US spends 18% of its gross domestic product on health against 12% in the next highest spender, France. Even the publicly-funded US health sector spends a higher share of GDP than those of Italy, the UK, Japan and Canada, though many people are left uncovered. US spending per head is almost 100% more than in Canada and 150% more than in the UK. In return for this massive spending, life expectancy at birth is the lowest of these countries, while infant mortality is the highest. Potential years of life lost by people under the age of 70 are also far higher, for both men and women.

Germany is interesting, too. The FT's Lucy Kellaway has pointed out that the Germans each year throw 217m sickies as a result of musculoskeletal disorders (which mainly means backache). In the UK the figure is 35m days, while in Greece it is only 1m. The cause is no doubt a thriving German GP-fed back therapy industry, including (according to Lucy K) vendors of volcanic mud. But there is not much that any regulator can do to overcome what seems to be a deep-seated national obsession, which certainly doesn't seem to harm the German economy, which is in much better shape than the Greeks'.


Martin Stanley