NHS hospitals in the North of England are performing better on the new star ratings system than those in the South. According to new research from the Centre for Market and Public Organisation (CMPO), based at the University of Bristol, the explanation lies in regional differences in the gap between wages in the private and public sectors.

Their analysis indicates that hospitals in areas where nurses are paid relatively well compared with the private sector score higher on a range of performance targets. This suggests that allowing hospital managers to raise pay in parts of the country where it is relatively low may be a way to improve NHS performance

As part of its efforts to increase productivity in health care, in 2001, the government introduced a rating system that measures the performance of NHS hospitals against a wide range of targets, including aspects of quality, volume and financial performance. To sharpen incentives further, the government has linked performance on these star ratings to the degrees of freedom to be given to hospital managers.

So why should there be a regional pattern to the star ratings with hospitals in the North performing better on average than those in the South? It cannot be due to differences in the health of the population since, in general, this is better in the South than the North. The research suggests that differences in pay between hospitals located in high costs areas – basically the South – and those located in low cost areas – basically the North – are a key factor driving the differences in star ratings.

Pay in the NHS is still primarily set centrally. Hospitals in London and the South East pay more than hospitals located elsewhere. All other hospitals pay the same amount to staff at a given grade and experience.

But wages in the private sector are not fixed in this way. They reflect the state of the local economy. Areas of high demand for labour will have high private sector wages; areas with low demand will have low private sector wages. And since the pay differences between regions within the NHS do not fully reflect these private sector wage differentials, the differential between NHS pay and private sector pay varies considerably across the country. Hospitals in high cost areas are likely to pay less compared with the private sector than hospitals in low cost areas.

This means that hospitals located in high cost areas – those where wages outside the NHS are high – face more competition for staff than hospitals located in low cost areas. Low relative pay can lead to two possible shortages: staff and quality. It can cause problems in hiring and retention, which can affect productivity and quality.

Nurses are key staff in the NHS. The research examines whether the gap between what nurses are paid and what they might earn outside the NHS has an impact on the star ratings – a measure of the quality – of NHS hospitals. Unpacking the star ratings into their separate components reveals that hospitals located in areas where the outside options for nurses are good have poorer outcomes in several areas:

For the 2001 targets, the nurses’ pay gap is associated with 7 of 21 targets. 4 of these are ‘key’ targets – the number of patients waiting for an inpatient appointment, and measures of outpatient waiting, trolley waiting and hospital cleanliness.

For the 2002 targets, the pay gap is associated with 11 out of the 37 targets. 10 of these are performance targets, 6 based on inpatient surveys.

Across the two years, over a third of the individual targets (18 out of 53) are negatively associated with the pay gap. Many of the targets associated with the pay gap are based on patient surveys. Patient experiences depend, to a large extent, on their contact with nursing staff. The fact that these outcomes are rated as better where staff are paid relatively more points to a link between the ratings and pay.

The results imply that some of the performance of NHS hospitals may be less related to managerial ability than to the labour market in which the hospital is located. This in turn suggests that allowing managers to raise pay in areas where it is relatively low may be one way to improve the performance of the NHS.

But it also suggests that allowing the management of three star performers to take over failing hospitals may not necessarily be bringing in better managers but bringing in managers who have worked in areas where the quality of NHS staff is higher.

‘Star System: Explaining the Regional Divide in NHS Performance’ by Simon Burgess, Denise Gossage and Carol Propper is published in the Autumn 2004 issue of the bulletin of the Centre for Market and Public Organisation.

The article summarises 'Explaining differences in Hospital Performance: Does the Answer Lie in the Labour Market?' by Simon Burgess, Denise Gossage and Carol Propper, CMPO Working Paper No. 03/091.