IEA Blog

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.

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.

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.

In the early 1990s, Nigel Lawson dubbed the NHS “the closest thing the English have to a religion”. Today, this religion has probably been replaced by a more disillusioned belief that the NHS is “the worst form of healthcare, except all the others”.

True, in international league tables, the NHS usually performs badly; true, waiting lists remain an ongoing problem; true, the unhygienic state of some hospitals still attracts headlines. Nevertheless, key questions remain in the minds of the public: how would poor people get access to healthcare without the NHS? Do we want them to go untreated while the rich enjoy luxury care?

Recent experience from India suggests that these fears are misplaced. Following liberalisation in the sector, India’s healthcare industry is about to develop a low-cost market segment, opening up healthcare to the poor.

The best thing about India’s nascent system is that there is no system. There is widespread experimentation with different business models. Extensive use of economies of scales, digitalisation, price discrimination, economising on comfort, and careful scrutiny of costly new technologies all act to cut costs, but do not necessarily compromise quality of treatment. The growth of the yet embryonic private health insurance industry could spread access further.

But how come technological progress makes healthcare cheaper in India and elsewhere, while it drives up its costs in Western systems?

It all depends on the incentives consumers and producers face. Over the last 10-15 years, there has been an explosion in consumer electronics. Yet most of us do not spend a vast share of our budgets on these items. While many expensive new products have emerged, in most instances low-cost alternatives have quickly become available and for a simple reason: there was demand for them.

Incentives are vastly different in Western healthcare systems. Since the bulk of spending comes from governments (usually well above 70% of the total in OECD countries), consumers only pay directly a fraction of the costs and therefore do not demand no-frills alternatives. Thus fewer low-cost options are developed in the first place. New medical technologies usually add to the stock of the existing ones, and seldom substitute them with a low-cost alternative. When costs finally spiral out of control, governments respond with blunt rationing at the expense of patients.

Hopefully, the West will learn from the Indian experience before it occurs to Indian policymakers to emulate NHS-style socialised medicine.

The Liberal Democrats recently became the first major political party to endorse fully the right of patients to top-up their National Health Service care privately. Labour and the Conservatives favour some relaxations to the existing top-up ban, but nothing close to its complete abolition.

The debate over so-called “top-ups” started in late 2007, after a couple of cancer patients decided to upgrade their NHS-provided chemotherapy with a privately purchased drug which was not offered on the NHS. Subsequently, the Department of Health (DH) issued guidance which outlawed such combinations of NHS and private care. To prevent what the DH called a “two-tier NHS”, it ruled that patients who purchased a health product that went beyond a standard NHS therapy should lose their entitlement to that therapy altogether. For the cancer patients affected, this meant that they would have to pay the costs of chemotherapy, consultations, laboratory tests etc.

The DH’s standpoint is gravely misleading. People are “topping up” public services all the time, inside and outside the health sector. A lot of people pay privately for MRI scans, hearing aids and elements of dental care without losing NHS coverage as a result.

Carrying the logic deployed by the DH one step further, parents who pay for private lessons to enhance their children’s school performance should be charged the full costs of schooling, because they are “topping up” state education. And people who install a burglar alarm in their homes should be billed with their share of policing costs, because they are “topping up” state-provided security services.

But the real irony is that the DH’s policy brings about exactly what it attempts to prevent: much more unequal access to healthcare. In the test case which triggered the guidance, the top-up drug would have cost £4,000 a month. The affected patients found it hard, but not impossible to fund it; they put their houses up for sale and used their savings. However, the cost of the full package, at £10,000, would have been completely out of their reach. The top-up ban therefore prevents low and middle-income earners in particular from purchasing additional medical services.

In the longer run, if top-up payments were legalised, incurring them would become an insurable risk. A whole new market of top-up insurance policies could emerge. Access to the latest treatments would become much more affordable. A private pillar of healthcare funding would develop, enabling people to avert the risks associated with ongoing government rationing. 

The prevailing Western NGO view of how we should solve problems such as lack of health and education provision in very poor countries is that we expect the government to provide or finance such provision. If the governments of poor countries cannot make provision, then we expect our own governments to finance it through development aid. Quite apart from any economic arguments about the usefulness or otherwise of foreign aid, this point of view ignores the lack of capacity of government to deliver. The governments of very poor countries are generally not able to provide sophisticated systems of health and education, even if it were desirable. Still less can development be “done” to poor countries by Western countries.

 
It was most gratifying to see at the Institute of Actuaries last night a presentation on health provision in the Indian slums through small-scale mutual insurance. The model is very similar to the Friendly Society movement that did so much to bring insurance to the formerly uninsurable in the UK in the nineteenth and early twentieth centuries. Eamon Kelly described how 40,000 very poor slum dwellers (there are high hopes that the scheme will expand to cover many, many more, quite quickly) under the umbrella of the Uplift Health Mutual Fund form a series of micro-insurance units. The members pay premiums and can make claims when they need medical treatment. Each unit has a claims management committee that decides how to prioritise claims, but there was no evidence of valid claims not being met. The model has many subsidiary benefits that one does not get from either state-provided healthcare or from policies provided by proprietary insurance businesses. The group has a strong incentive to ensure that people are well educated about maintaining their own health; there is peer pressure to prevent frivolous claims; and the group is much more effective at purchasing healthcare services at good prices than individuals who were self-funding could ever be. And, of course, there is the incentive to be efficient, that is completely absent in state-provided healthcare.

 
Interestingly, Eamon Kelly mentioned that, if the state should become involved, it will help pay the premiums or meet some of the running costs of the organisations. In other words, it will build on these spontaneous systems rather than supplant them – thus avoiding the huge mistake that we made in the UK in 1948.