The use of fixed prices to prevent competition driving down care quality could become “increasingly problematic”, a “seminal report” warned this week.

The study from the Office of Health Economics also advised ministers that improving patient reported data on the quality of services could allow them to encourage price competition for some services.

As the commission acknowledged, current evidence suggests price competition in healthcare “may lead to lower quality care”, particularly where quality is hard to measure.

For this reason the government says its plans to open NHS services to “any qualified provider” will drive competition on quality alone, with prices fixed by regulator Monitor. But the commission’s report warns that fixing prices “comes at a cost”.

“Over time the process of determining at what levels to fix the prices of hundreds of different services may become increasingly problematic as providers’ costs converge onto the prices they know they will be paid, and information about the possibility of cost reduction becomes increasingly obscured by the lack of benchmarks,” it states.

“It is difficult to fix prices at levels appropriate to the service quality desired when that quality cannot be observed, and not all aspects of quality are observable. Consequently, the risk exists that prices fixed by a regulator may increasingly diverge from the costs of providing the services to the desired quality.”

The commission concluded that competition could potentially get the NHS more and better quality care for its budget, but that competition itself came at a cost. Competing providers could have greater incentives to cut corners or “cherry pick” easy and lucrative patients, it argued. As the service would need to spend time and money monitoring and managing competitive markets to protect quality, it needed to choose “priority areas” for introducing competition.

A “framework” to help clinical commissioning groups identify where competition could be “feasible and beneficial” has been published by the commission. It covers eight broad areas: density and variability of demand for a service; patients’ willingness to travel; ease of measuring quality; economy of scale; economy of scope; power imbalances between providers; scope for cherry picking; and the extent to which an incumbent provider is considered by politicians as “too important to fail”.

Department of Health provider policy director Bob Ricketts was a member of the commission and hailed its influence on competition in the NHS. He said: “I think in 10 years’ time we will look back and see this as a seminal report.”

Mr Ricketts said the NHS Commissioning Board and CCGs could use the OHE framework “to help them decide when, where, and even if to use competition”. “That’s something I’ll be very keen to recommend that the board looks at,” he added.

He said to ensure competition based on quality the service needed to develop “really good outcome measures”. “Now that we’ve got [patient reported outcome measures] we can actually start to look at whether we’re getting good value, both from the procedure [and] between providers,” he told HSJ. “We need to take that agenda forward aggressively.”

The commission found that if patient reported outcome measures could be widened to cover the majority of NHS care, “consideration could in future be given to encouraging price competition for those services where quality comes to be better specified and measured”.

As HSJ previously revealed, the commission also reported that competitive tendering – organisations competing to be the only provider of a service for a set period – “may be equally attractive” when compared with the use of any qualified provider, and was “possible in a wider range of service types”.