NHS reforms will lead to supermarket-style discount surgery deals

The NHS is bracing itself for a price war in which hospital trusts will offer supermarket-style discounts to fight each other for business.

The Government is to permit hospitals to compete on price for the first time, raising the prospect of two-for-one deals on surgery and cut-rate consultations for certain specialties.

The dramatic shift towards a more commercial market in the NHS is announced in a single paragraph in the NHS Operating Framework for 2011-12 published last week. Critics described it as “seriously worrying,” with the potential to lead to forced hospital closures, higher death rates and escalating political tension.

Paragraph 5.43 says: “One new flexibility being introduced in 2011-12 is the opportunity for providers to offer services to commissioners at less than the published mandatory tariff price, where both commissioner and provider agree.”

It adds: “Commissioners will want to be sure that there is no detrimental impact on quality, choice or competition as a result of any such agreement.”

The chief executive of one major NHS trust, who did not want to be named, said: “From my perspective, this is very challenging. If [price competition] is implemented significantly this will be a full blooded market. I will have to do as the supermarkets do.

"There will be huge pressure on me from my board to reduce prices and increase market share. There are a lot of bullish GPs out there saying they will go to the cheapest provider already. This gives the opportunity for trusts to undercut one another on price. We will be forced to act much more commercially. Hospitals will have to think more radically about restructuring their services. It could lead to huge tension politically.”

The move is guaranteed to create maximum turbulence in the NHS as Andrew Lansley, the health secretary, seeks to drive through the biggest reform in its history, abolishing central management and devolving control of 80 per cent of the budget to GP consortia.

Prices for operations and other treatments are currently fixed by the Department of Health and hospital trusts are only permitted to compete on quality, offering better outcomes, cleaner wards or shorter waiting times to win contracts from GPs.

From next April, the national “tariff” of prices set by the health department will effectively serve as a cap, with hospital trusts free to discount prices below it in agreement with the new GP Consortia.

Professor John Appleby, health economist at the Kings Fund, the health policy think tank, said research on the effect of price competition on the quality of medical care during the 1990s internal market introduced by the previous Tory government showed that it led to higher mortality.

“There is the potential for a price war. It is clear that some hospitals are well positioned to offer discounts - big hospitals can cross-subsidise their services. The risk is that some hospitals may lower their prices, which will be superficially appealing, but offer a less good operation and GP commissioners may not be able to spot that it is less good.

"Price is easily observable, quality is not. They [the Department of Health] are saying commissioners must watch out for any ‘detrimental effect on quality’ - so they are saying themselves there is potential for that. How can they reassure themselves that GPs won’t be deleteriously affected?”

Zack Cooper of the London School of Economics, author of an influential study showing that competition in health markets increases quality but only when prices are fixed, said: “I was very worried when I saw that paragraph. Research shows that with price competition prices go down but quality tends to fall. In simple terms price competition leads to higher death rates. With fixed prices, quality tends to rise. Quality is so hard to measure, it is much easier to measure price. One paragraph at the end of the NHS Operating Framework could have profound effects.”

Nigel Edwards, acting chief executive of the NHS Confederation representing hospital trusts said: “We could see people being pressured by commissioners. That would be a worry. If the Americans are having difficulty with it [price competition], spending large amounts on administration, we need to be cautious. I’d like to compete on quality not on price.”

A spokesperson for the Department of Health said: "Commissioning must continue to be driven by delivering the best possible care for patients and competition should be based on quality and efficiency.

"This flexibility can only be used if there is agreement between provider and commissioner, and its use must not have a detrimental impact on quality, choice or competition. Where this flexibility is used, the money that it could release will be available to commissioners for investment in frontline services.

"We expect parties to any agreement to monitor its operation and to ensure that there are no adverse effects."