IEA Blog

Plans to introduce a minimum price of 50p per unit of alcohol in the North-West of England – apparently supported by David Cameron – are deeply misguided. In all markets price-fixing is a bad idea and alcohol is no exception. Problem drinkers may simply forego other goods in order to pay the higher prices. Minimum prices could also encourage drinkers to buy alcohol in other areas or switch to low-cost, “informal” sources such as home-brew or “booze cruises” across the Channel. The policy is therefore likely to be ineffective and could even prove counterproductive if alternative supply routes expand. A further important objection is that it will unfairly penalise moderate drinkers.

A better approach than minimum prices would be to focus on eliminating the ways in which the government facilitates alcohol abuse. In particular, binge drinking is in some ways a direct consequence of the welfare state. If the government offers to pay for any treatment people need, they will make the most of it. They can live dangerously, safe in the knowledge that the NHS safety net will catch them.

Such “moral hazard” can be addressed by charging those who repeatedly seek treatment for self-inflicted injuries and illnesses. The best solution, of course, would be to scrap the NHS entirely and let the private sector fill the gap. If people had to pay for their own healthcare, they would have strong incentives to adopt healthier lifestyles. The burden that alcohol abuse imposed on taxpayers would also be reduced substantially.

Digital governance has revolutionised the NHS. While progress has been slow and very expensive, underpinning the progress is the ease with which feedback can be gathered and processed into a target.

While early targets caused confusion and chaos (in one hospital patients were sent home still recovering from surgery to make beds available), their re-evaluation and adjustment based upon patient requirements has led to medical staff delivering better services. Effective feedback has allowed weak staff to be flagged and has made other staff work harder – although the difficult bureaucracy needed to fire employees has inhibited progress.

As well as this, competing NHS trusts enable underperforming hospitals to be identified and closed down, and good hospitals to become independent foundations. So, although the “right” targets are still developing, Labour’s NHS legacy is in the hands of technocrats reading off spreadsheets and the NHS is no longer directly run by the central state. To some extent the target culture simulates the effect of competition, without actually privatising NHS funding.

Of course the incremental and expensive improvements we currently see in the NHS could be speeded up by the de facto privatisation of healthcare – for example, the coalition could sell hospitals to private firms and surgeries to GPs. The profit motive would undoubtedly lead to better results. However, while the doomsayers who compare planning the NHS to the impossible job of organising the whole Soviet economy were right 13 years ago, their viewpoint is arguably less valid today. Local managers, accountable for local results, mean the so-called monolithic NHS is actually a fragmented umbrella body.

Ludwig von Mises demonstrated that only the free market reveals people’s preferences, and any deviation from it leads to economic inefficiency, as well as the moral conundrum of why one person should subsidise another. But – and here’s the rub – there are important reasons voters turn away from any politician who airs the idea of scrapping or privatising the NHS. Voters fear that some people wouldn’t get healthcare, maybe because they could not afford it or just decided to opt out – and for many people health is too vital an issue to take risks with. Indeed, a common perception is that accident victims with no insurance would be left to die on the street. While it may be possible to convince academics that healthcare needs radical reform, ordinary Britons strongly support the welfare state now and recoil from the risks they associate with market-based systems.

My recent book on health policy, Who Decides Who Decides?, discussed the many ways in which central government does all it can to avoid placing money directly into the hands of the consumer. Andrew Lansley’s reforms represent another hugely costly exercise in that evasion. 

We need competing providers and competing purchasers, with individuals controlling mobile money. While the poor could be supported by tax-transfers, everyone else should be encouraged to be responsible for their personal fund, to which they could add. Government will never be able to fund by direct taxation the necessary treatments, for example, the new generation of cancer drugs, which will be denied to us in the UK.

The bureaucratic cost of regional health authorities is a good saving, of course. But I suspect that the Tories will now have a huge fight, and political losses, about these new reforms whilst still failing to tackle the fundamentals on the demand side.

Gordon Brown tried to spend his way to safety, but with no management changes. In the 1990s, when I was a central policy adviser, GP fundholding worked well in disciplining some providers. This is it once again. The local lesson was that if you give people direct financial controls you get results. It’s likely that productivity will indeed rise. But other issues such as encouraging individual responsibility for better healthy living are not going to be addressed, save by the usual waffle. This proposed reform entirely evades the key issue of individual responsibility. If there is no financial cost to the individual for drinking, smoking, not exercising, and then demanding care, what is the incentive to behave responsibly?

As to politics, how will they Tories deal with the bankruptcy of failing hospitals – made more obvious by the new funding system? By huge tax-based centralised subsidy? Many will be in marginal seats. And even good hospitals will have financial troubles. If GP demand moves away, you cannot sack half a nurse, and what do you do with expensive, tenured consultants from whom no-one wants to buy services? It will not be attributable to consumer demand, but to the actions of government agents, the GPs.

The better model is to expand the direct payments system which we have seen working in social services. Alan Milburn understood this. I do not understand why the Tories will not make these incremental changes.

It is easy to be pessimistic about Britain’s future economic prospects. The Lib-Con coalition agreement contains policies which are troubling. Indeed, there is a danger the coalition will continue the country’s long-term trend away from economic liberalism.

Ten years ago, the UK was one of the five freest economies in the world. It has since been moving downwards gradually, mostly because of large increases in the size of the state. If the share of government spending in GDP increases by more than ten percentage points in a single decade, it is no exaggeration to call this a real economic transformation.  

However, keeping in mind F.A. Hayek’s seminal paper The Intellectuals and Socialism, which made the case that a nation’s course is ultimately determined on the battlefield of ideas, there are still reasons left to be optimistic. Why?

The UK is not the first country in the world to experience state growth of this magnitude. In the 1970s, West Germany recorded almost exactly the same aggregate figures: government spending grew from just below 40% to just above 50% of GDP in a short time. But there was one major difference: the latter development followed exactly the pattern outlined in Hayek’s above-mentioned paper. First, new anti-liberal, anti-capitalist ideas gained ground among the intellectuals. Subsequently, they entered the mainstream discourse, and eventually, they became the mainstream. In the end, politicians merely executed what had already become the zeitgeist.

No such pattern is observable in Britain. According to the British Social Attitudes Survey (BSA), in the mid-1980s, 36% of all respondents saw it as the government’s role to provide guaranteed jobs. In 2006, approval of this position had fallen to 16%. In the same time span, approval for state support of industries fell from 52% to 27%; approval for high unemployment benefits fell from 42% to 10%; and support for activist redistribution fell from 45% to 25%. Not too bad for a start.

So, if public opinion has not shifted to statism, why has the state grown so large? Here is one possible explanation: there are some big areas in which the statist post-war consensus has never been shaken, above all, health and education. Over the last two decades or so, people’s preferences have shifted in favour of health-related and education-related goods. These are the areas where spending has grown most and where it has been most popular (according to the BSA). If health and education had been private industries, their share of GDP would have increased at the (relative) expense of other industries. But as long as they are state-provided, a desire for growth in the health and education sectors means growth of the state. Advocating small government without explicitly attacking the consensus that health and education must be state-provided will then be read as advocating a cap on the size of these sectors. This would lead to a sectoral composition of the economy which would not be in line with consumer preferences.

Unfortunately, in the present set-up, public funding of health and education cannot easily be topped up and complemented with private funding. If the above explanation is correct, then advocacy of spending cuts should always be combined with advocacy of policies that increase people’s opportunities to move beyond basic state provision. Education vouchers that can be privately topped up are one example. Permitting patients to mix-and-match the healthcare services of the NHS and those of private providers, perhaps funded by private supplementary insurance, is another one. 

Many years ago I was in hospital for a minor operation. The tiny ward had room for four but there was only one other occupant; an old man who was very ill. A nurse asked me if I could chat to him to ease his final hours. I am hard of hearing and one of my hearing aids had run out of juice, so I said to the nurse I’d be delighted to oblige if someone could nip out and get me a battery. She asked if it was an NHS aid and I said no, but the batteries were standard. “No, we can’t help you if it’s a private hearing aid,” she said, forgetting that she had asked me for the favour.

I am reminded of this because in yesterday’s paper I read that a woman has been denied an operation on the NHS after paying for a private consultation regarding her severe back pain. On the NHS she would have had to wait five months just for a consultation (with the same surgeon).  Now, she goes to the back of the queue (eighteen weeks) for another consultation on the NHS (with the same surgeon).

This is because any NHS patient has to be “referred on to an NHS pathway.”

Quite right too, you may say; she was queue-jumping. But what this argument ignores is that in paying for her consultation she was also paying (via taxes) for another one on the NHS which she did not utilise, hence easing the strain on NHS consultations (and thus operations) for countless other people. She was shortening the queue, not jumping it, with her own money. (Just think of what a fantastic service the NHS could give if the private sector took on half of their patients without removing any of its funds!)

Now she must pay for her operation as well, unless she goes to the back of the current queue and starts again. It’s a mad world.

A new report from Policy Exchange (strapline: David Cameron’s favourite think tank) has apparently “re-ignited” the “controversial” debate about tobacco.

The document is an enthusiastic embrace of central planning dogma over free market common sense. As Ayn Rand said, if you end with the wrong conclusions you should always check your premises - the authors seem to start with socialist principles and they reach correspondingly extraordinary conclusions.

The British government have got tobacco tax pretty much spot on, the authors have concluded. The only marginal failing is that cigarettes aren’t taxed quite enough – a packet of twenty cigarettes should cost you £6.36 rather than the prevailing price of £6.13.

They have totted up the costs of tobacco consumption to “society” – including (but not limited to) NHS treatment of smoking-related illnesses, house fires, employee absenteeism, litter collection and even lack of economic productivity caused by early death.

The last of these assertions is particularly offensive. If I drop dead in my mid 40s from lung cancer, I have – I’m told – let the side down. I should have been economically productive for another couple of decades, for the sake of the nation’s GDP. The authors do not seem to realise that people get paid to work. They benefit from their own productivity. Their productivity is not a social benefit – except very marginally – from which society as a whole gains.

The cost of smoking-related diseases is very real. And the NHS picks up a fair chunk of the bill. But if every smoker quits their habit tomorrow, they are still going to die of something. The question isn’t how much smokers cost the NHS – but how much less would they cost the NHS if they didn’t smoke. The Policy Exchange research assumes they would cost nothing. But dying of Alzheimer’s as an ex-smoker (or non smoker) in your 80s is going to cost much more than dying as a chainsmoker of heart disease in your 50s. And that doesn’t start to factor in the saving made on state pensions by smokers having the courtesy of dying many years younger.

A second collectivist fallacy perpetuated by the report is to assume that illness or absenteeism (in the form of cigarette breaks) is somehow a burden on society. It is not. It is a matter entirely for the employer and employee – though it could be argued that anti-discrimination legislation prevents employers from choosing (if they wish) to employ only non-smokers. I would have been surprised if the IEA had not hired me on the grounds that I smoke tobacco, but I would have respected their right to reach such a conclusion. If legislation stopped them from not employing me on those grounds, it should be repealed.

With regard to house fires, buildings insurance companies – just like life insurance companies – are certainly entitled to charge higher premiums to smokers if they wish. The fact that they do not suggests that the risk is too trivial – why should the government step in and over-rule them by collecting extra taxes on cigarette smokers to cover the costs of extra house fires (indeed, this raises the issue of whether the tax would be distributed to fire insurance companies…)?

But the most exasperating element of the document is its reliance on the theory of Marxist false consciousness. What we smokers really want is to give up smoking. And what we need is taxpayers’ money spent on encouraging us to do so. It’s not enough that 65% of smokers apparently want to give up. It is not sufficient that pharmaceutical companies can – and do – spend millions advertising their array of chewing gums and nicotine patches on primetime television. You would have thought that allowing Pfizer to advertise nicotine products in the middle of Coronation Street whilst simultaneously banning tobacco companies from being allowed to decorate a Formula One motor racing car would be advantage enough. Not according to this report. The two thirds of smokers mercilessly trapped in their habit need an extra shove from the public purse. So, whilst even the most evangelical public-spenders accept that slashing public information budgets is an easy win, the authors actually advocate increasing the government’s advertising budget by £100m.

It seems that the authors suffer from two problems identified by Hayek. The first is the “fatal conceit”. They believe they have calculated the exactly correct tax to internalise all social costs – an additional 5%. This is remarkable. If a government has the information to do this, then central planning in the Soviet Union would have been effective. And maybe we should do this for all products: 4.3% tax for chips, 11.45% for cream cakes, a 2.657% subsidy for footballs (because of the “social” benefit of exercise). Why pick on cigarettes? Secondly, as Hayek identified, once the state provides and regulates certain things (e.g. the provision of health or labour market contracts) the lovers of state control see external costs and benefits all over the place. There is then literally no limit on the government intervention that can address those costs and benefits and the inevitable result is serfdom.

The pioneers of Britain’s welfare state may have had good intentions. By founding the National Health Service (NHS) in 1948, they hoped to improve access to treatment for the poor. But, more than sixty years on, it has become a bureaucratic monster that ranks among the worst-performing health care systems in the developed world.

Socialist central planning failed in the Soviet Union, and it has failed again in the NHS. In the absence of market prices, resources must be rationed by state officials. And as Russian housewives once queued for bread, British patients now queue for health care. Winston Churchill once defined socialism as “Queuetopia”.

Today the NHS has many hundreds of thousands of people on waiting lists. Despite years of reform and tens of billions of pounds of extra funding, it is still common for patients to wait several months for routine procedures such as hip replacements.

Even those with potentially fatal conditions may face long delays, while life saving treatments are often denied by bureaucrats on grounds of cost.

One deadly result is that cancer patients in Britain are far more likely to die than those in the United States. Cancer survival rates compare very badly with those of other rich nations.

But the NHS can’t even get the basics right – such as providing patients with adequate food. In 2007, there were almost 30,000 incidents of malnutrition, and a large proportion of patients are undernourished in NHS hospitals.

It is important to emphasise that these problems are not due to a lack of money. Expenditure on health in Britain is not low by international standards. In the absence of market prices and profits, health expenditure is allocated inefficiently by government officials. The system is further hampered by powerful unions that have thrived since nationalisation. It has been estimated that the NHS employs more than four times as many managers and support staff per nurse than a typical British private hospital.

Perhaps the most damning indictment of the NHS, however, is that it has failed in its original objective of eliminating health inequality. In practice, as with all socialist systems, those with the best connections and the loudest voices get better treatment and greater choice.

Yet despite such abject failure, the NHS has proved highly resilient to change. A key lesson from the British experience is that once people perceive health care as “free”, they will fiercely resist reform. Once socialist entitlements are introduced, it becomes almost impossible to roll them back.

America’s existing health care system is far from perfect – it is over-regulated and producer interests are too powerful. But as the Democrats prepare to push reforms through Congress, US policymakers should examine closely the disastrous experiment in collectivised medicine across the Atlantic. Britain’s NHS nightmare suggests that President Obama’s faith in government is misplaced.

The National Institute for Health and Clinical Excellence (NICE), which some label the government’s “drug rationing body”, recently barred an expensive liver cancer drug from being prescribed on the NHS. Patient advocacy groups called the decision “a scandal”.

In its ten years of existence, NICE has made a lot of enemies among pharmaceutical producers and patient groups. Rationing of healthcare was, of course, a reality long before NICE. But by making the process explicit, NICE provides a central focal point for critics – who, unfortunately, offer no better alternative.

Pharmaceutical companies, lobbying organisations close to them, and patient groups have frequently criticised NICE for the rigidity of its decision-making process. They urge NICE to become more “flexible” and “inclusive”, and to listen more closely to the views of “stakeholders” (i.e. themselves).

NICE’s decision making process looks roughly like this: the institute computes the number of additional life years that can be saved by introducing a new drug or other treatment. This figure is adjusted by a measure of the “quality” of life in these additional years, which yields NICE’s principal unit of account, the “Quality-Adjusted Life Year” (QALY). If a treatment costs substantially more than £30,000 per extra QALY (the “Incremental Cost-Effectiveness Ratio”, ICER), the institute will recommend it should not be available on the NHS.

The idea is to maximise the number of QALYs from a given healthcare budget. But such calculations can at best provide information on the average patient with average preferences. They cannot take account of individuality.

However, involving producers and advocacy groups will not inject additional information into the process. It is obvious which positions these “stakeholders” will take. They will argue that cost-effectiveness is all very well in general, but that the particular product they sell/need is a “special case” which deserves “special consideration”.

But when every treatment becomes a “special case”, we are back to square one again. Resources will then no longer go to the products with the best ICER, but to the products with the most vociferous advocates. Out of the frying pan, into the fire.

Patients need free choice between a range of coverage plans that differ in composition and extent. The decision about whether the “marginal pound” should be spent on new drugs, better hospital equipment, a bigger health workforce, or anything else, would then be made by patients themselves – not by politicians, technocrats, bureaucrats or providers.

The government has just announced that nursing will become an all-graduate profession from 2013. I don’t want to go down the route of discussing whether degrees are appropriate for nurses, an issue about which readers of this blog might have strong feelings. The point is, what has this got to do with the government? It might be thought that the government employs all nurses. That is certainly a moot point – NHS trusts are independent employers. But, even if the government were the indirect employer of all nurses, it does not take individual employment decisions. It should be for employers to decide what qualifications their employees have.

Now, it is perfectly legitimate for individual employers (trusts and so on) to say that they want everybody to have a degree, but nursing is supposed to be a profession. There is a Royal College of Nursing that is quite distinct from the nursing trades unions (even if it often behaves like one). As such, normal practice in most areas of professional services would be for employers to say that they want to employ professionally qualified nurses, with the qualifications being determined by the Royal College of Nursing (RCN). If the RCN then tries to restrict entry to the profession too much, employers will no doubt try to employ more ancillary staff and fewer nurses, or think about employing different types of staff with different types of qualification. Competing professional bodies might even develop.

But the amazing thing about today’s announcement is that it is warmly welcomed by the RCN. In other words, the RCN warmly welcomes the government nationalising its profession and taking over its duties for determining how nurses become accepted into the profession.

As it happens, I am an actuary. I don’t want to get into debates about the relative academic difficulty of actuarial science versus nursing. Such debates are futile and silly. The point is that the actuarial profession is not a graduate profession, and the government has certainly not decreed it as such. The profession sets its own exams. The actuarial profession would be entitled at any time to require a degree. And employers, of course, are entitled to hire people who are members of the profession, or not, as they please. But the idea that the state should decree that every qualified actuary should qualify by degree is bonkers. The profession may decree that, but, once the state decrees it, the profession no longer exists.

We all know what would happen if the state nationalised all pubs, integrated them into a “National Pub Service”, and decided that beer should be free at the point of use. Even ignoring adverse effects on efficiency etc, the state would have to introduce non-monetary means to prevent overexploitation of the sector’s resources. It would probably reduce the number of pubs, shorten their opening hours, and put fewer employees behind the bar. Expensive imported beer brands would disappear. Staff would probably be encouraged to put larger foam heads in each glass, and to refuse service to people who had had “too many”. Maybe the minimum age for drinking would be raised and complemented with a “maximum age”.

For these reasons, we would never create a National Pub Service. And in a recent article in the Times, Daniel Finkelstein argued that if we did not have a National Health Service, we would not create one now. But due to a psychological mechanism called the “endowment effect”, now that we have the NHS, we cling to it ferociously:

“Once someone owns something, once it is theirs, they value it more. This is closely allied to another effect beloved of behavioural economists – loss aversion. People much prefer avoiding losses to making gains.“

But if there was a widespread conviction in the British population that the NHS model had failed, would it really be impossible to dismantle it? Could an exit plan, even a radical one, not be drafted in such a way that the endowment effect would be neutralised?

How about a step-by-step exit plan that looked more or less like this:

1. The NHS ceases to be a provider of healthcare services and an owner of healthcare facilities, and becomes a reimbursement agency. In several small tranches, NHS facilities are sold to the independent sector. And while we’re at it, what would be wrong with nurses and midwives becoming shareholders of the hospital they work in? As legal entities in their own right, hospitals could be sued for malpractice or fraud. All providers would be free to set their own fees, and if these are higher than the NHS reimbursement rate, patients could choose to pay the excess.

2. People are allowed to opt out of the NHS and use their tax money to take out private insurance instead. Upon leaving, they receive a “compensation bond”, the value of which is related to their age and health status. Old and sick people would have to pay high insurance premiums in the private sector, but their bonds would enable them to offset that. Private insurers are required to smooth premiums over a lifetime by accumulating reserves while their clients are young. Old-age reserves are fully portable between insurers.

3. Market entry into health insurance and provision is eased. Trade unions are allowed to set up their own insurance schemes; charities and friendly societies are allowed to re-conquer lost terrain. The monopolistic licensing system for practitioners, drugs and medical devices is replaced by a system of competing private certification agencies. The market structure is deregulated. If McDonalds wants to open an in-house dispensary or a mini-surgery, they are free to do so, given that they are willing to assume the liabilities that come with it.  

4. The NHS no longer admits new entrants. However, if people incur health insurance costs that exceed, say, 15% of their annual income for a basic insurance package, then the state covers the excess. In this way, disabled and chronically sick people are just as lucrative customers to private insurers as health fiends and fitness trainers. 

My guess is that the endowment effect could be overcome. But whether such proposals could gain majority appeal, regardless of whether the starting point is the NHS or something else, is a different matter.