This presentation by Allan FELS AO (Professor, University of Melbourne, Monash & Oxford and former Chair of the Australian Competition and Consumer Commission) was made during the session on Competition in public markets held at the 16th meeting of the OECD Global Forum on Competition on 8 December 2017. More papers and presentations on the topic can be found out at oe.cd/28n

1. Competition and choice in
education, health care and other
public services
Allan Fels and Darryl Biggar
Global Forum on Competition
8 December 2017

2. Motivation
• Education, health care and
other public markets
comprise a large proportion
of GDP and government
spending.
• Yet the scope for competition
and choice in these sectors is
often limited or deliberately
restricted.
• Can we use choice and
competition to improve
outcomes in these sectors?
Education spending (excluding tertiary) in selected OECD
countries as a percentage of total public spending; Source: OECD
2

3. The overall question:
To what extent can we harness the forces of
competition to deliver greater efficiency and better
outcomes for consumers and users of education, health
care and other public services while preserving (or
better promoting) the underlying public policy
objectives in these sectors?
3

4. Introductory comments
• This is not an ideological exercise but
an assessment of whether there is
scope for better outcomes while not
sacrificing key policy objectives.
• The focus is not on contracting out
or competitive tendering – rather on
choice and competition “in the
market”.
• There is a large literature on these
issues, including work by the OECD
which we can draw on…
4

5. Methodology
For each sector we follow a three-step approach
1. What is the
underlying rationale
for government
action?
2. What are the
barriers to effective
choice and
competition?
3. What might a
framework of
effective choice and
competition look
like?
5

6. Subsidies and competition
• Education and health care are
heavily government subsidised.
• The manner in which those
subsidies are paid strongly
affects the scope for choice and
competition.
• If the subsidy is paid as a “fixed
price”, this is compatible with
choice and competition, but
may give rise to problems, such
as cream-skimming.
Government pays fixed
price to supplier chosen
by the user/consumer
Pros: Strong incentives for suppliers to
compete to best meet the needs of the
customers
Cons: Suppliers have a strong incentive to
identify and refuse to serve some higher-
cost customers…
6

7. Education: The rationale for intervention?
There are many rationales for public
provision of education, such as:
• Productivity externalities
• Citizenship (democracy) benefits
• Credit market failures
In our view, the primary rationale for
government subsidization of education
is to ensure that a functional level of
education is available to all citizens
regardless of family background.
• An equality-of-opportunity argument
Stiglitz (Nobel prizewinner): “There is a
widespread believe that the life chances of a
child should not depend on the wealth of his
parents or the happenstance of the
community in which his parents live”
7

8. Education: The scope for competition
• There is scope for competition
between rival schools especially in
larger urban areas.
• Some assistance with transportation may be
required.
• Competition may not be feasible in rural areas,
or for specialist schools.
• Some parents may not be willing or
able to make effective choice and
may require assistance.
• Schools must have the freedom to
compete and must be free to enter
and exit the market.
8

9. Education: Pro-competition reforms?
• We must not ration access to
education on the basis of ability to
pay.
• No “topping up” allowed?
• The setting of the fixed fee or
payment is very important to
prevent schools competing
vigorously for the low cost-to-
serve students while rejecting
higher-cost students.
• “Cream-skimming” must be prevented.
9
with

10. Choice and competition in education
• Many countries have
experience with competition in
the education sector.
• This experience has been
surveyed, e.g., in works by
Julian Le Grand and by the
OECD.
Is it possible to design a system which
encourages choice and competition, promoting
efficiency and effectiveness in education, and
greater responsiveness to customers’ needs
without increasing stratification or segregation
in the school system? We remain hopeful!
10

11. Health care: Rationale for intervention?
• Why are governments involved in
health care? Two arguments:
• Competitive markets for short-term health
insurance cannot protect customers against risks
of long-term (chronic) health conditions.
• Access to health care is important for equality of
opportunity.
• We will focus (in this presentation)
on achieving competition within a
single-payer system (as in most
OECD countries).
11

12. Health care: Scope for competition
• Competition is feasible for most common
medical procedures, especially in urban
areas.
• Competition may not be feasible in specialised or
infrequent services (e.g. lung transplant).
• Competition may not be feasible in remote or rural
areas.
• Patients are not well informed and are
likely to need assistance in making the
choice decision.
• Hospitals must be able to compete and
must be able to enter and exit the market.
From the Harvard Business Review:
12

13. Health care: Pro-competition reforms?
• Many countries and systems use
various forms of fee-for-service or
prospective payments.
• Careful definition of the fee is necessary to avoid
cream skimming.
• Many countries use carefully
differentiated “Diagnostic-Related
Groups.”
• Australia has an independent hospital pricing
authority.
• Concerns remain about role of GP as
gatekeeper or over-servicing.
13

14. Other public services
• Similar competition issues arise in
other markets which feature
significant government subsidies.
• One approach is to pay subsidy
direct to consumer, allowing them
to choose how to spend the funds
in a way that best meets their
needs.
• Such approaches are common in,
say, the provision of disability
services or housing services.
14

15. Conclusion
• It is important to ensure that
education, health care and other
public services are delivered as
efficiently as possible, consistent
with government objectives.
• Choice and competition may have
a role to play in enhancing
incentives.
• Pro-competitive reforms have to
be done in a way which does not
undermine the underlying social
problem.
• With appropriate safeguards there is
some scope for pro-competitive
reform in these sectors.
• Careful attention must be paid to
ensuring customers are willing and
able to make an effective choice,
and that effective competition can
be sustained.
• OECD countries have some
experience which may yield valuable
lessons.
15