Over in the UK, the long period of flirting with market-based solutions to the NHS’s problems has finally come to a head, with the new coalition government deciding to abolish the cap on fee-paying patients at public hospitals. This means that the big hospitals can compete for a supposedly lucrative health tourism and private health market to top up their income, which will in theory enable them to increase their revenues at a time when the government (for no reason I can understand) thinks that it needs to cut government spending viciously.

Market reforms of the British NHS have been proceeding under Labour for about 10 years, using a softly-softly approach to liberalization which I think was probably necessary. There are probably a lot of people in the UK and America who think that a universal health care system is not compatible with private markets (for different reasons in each case) but this is very far from the truth – most “government-funded” health systems involve significant amounts of private health care, either on the provider side (in Germany and Japan) or on the provider and the insurer side (in Australia and Ireland)[1]. So, broadly speaking, market reforms in the UK will finally bring the NHS more into line with the better-quality systems of the rest of the developed world (outside of the US) where healthcare is (relatively) cheap and generally very high quality.

However, I think the Tory reforms won’t achieve any of their stated goals, and will have the added side effect of setting back health equality in the UK. I think they will have an effect similar to the reforms in Russia immediately after the collapse of communism, in that they will produce a few winners and a lot of losers; and the winners will largely be those who are politically connected or have a lot of luck. This doesn’t have to be the case with a well-managed market reform, and there are particular reasons why I think that the reforms will have this effect. I want to describe what I think will happen in the UK, but first I need to explain the two key problems that the NHS currently faces, which will be the cause of the reforms’ failure.

The NHS’s two main problems

Underfunding: By some kind of ephemeral standard, all health systems are underfunded, since we always want to spend more on making people better. However, by the more concrete standard of EU spending on health, the NHS has been underfunded for about 20-25 years. The NHS only recent returned to funding levels equal to the EU average, after a long period of underfunding under Thatcher, followed by a slow year-on-year increase in funding under Labour. This increase may have been “slow” but it’s an indication of how under-funded the NHS was that before the election Labour was talking about figures for funding increases above 10% relative to 1997[2]. A system that is 10% below EU standards for 20-25 years is pretty seriously underfunded, and this has ramifications in many areas. The most obvious is capital investment, which will be significantly poorer in an underfunded system, and this is a really big problem in health where new treatments and systems require significant capital investment. There are also significant quality-of-life issues in the NHS, such as the mixed-sex dorms that the tabloids love getting heated up about, which can only be redressed through capital investment and which, while not life-threatening, are certainly noticeable to the average patient. Also, of course, overcrowding has always been a problem in the UK and it is through capital investment that overcrowding is reduced.

But further to this, defunding your health system has significant effects on its workforce, and not just of the “overworked and underpaid” kind. If you consistently underfund your workforce for 20 years, whole disciplines will stagnate and become underperforming relative to their European peers. Particularly, the kind of “back office” “managers” that the Daily Mail loves to hate are the first to go in a cash-strapped system, and over the years are slowly replaced by inferior versions of themselves, who are underpaid and undertrained. These “paper pushers” do the unimportant stuff – you know, scrutinizing contracts for services, investigating quality of care, overseeing equipment purchases, managing demand – the sorts of things that actually require considerable skills and industry-specific experience. It doesn’t come as a surprise to me that after years of underfunding and calls to “quarantine frontline services” from cuts, the NHS embarked on a massive IT contract that ended up running over time and over budget. It’s as if they had lost expertise in managing projects and negotiating contracts…This can have ramifications outside of health too. Because the health system in most countries is a significant part of the economy, and its activities drive the development and maintenance of small but highly-specialised disciplines (like statistics, radiology, etc.), when you underfund your health system you also cause a drain in the numbers of skilled experts from those fields. In this regard the underfunding of the NHS has done the world a disservice – the UK, traditionally a world leader in statistics and epidemiology, has slowly given ground to the US and Australia in this field.

This phenomenon will also create new cultures. The NHS has a cash-strapped “make do” culture, and an expectation that patients will grin and bear the threadbare atmosphere[3]. This ain’t good for a health system, and it doesn’t surprise me that one of the main causes of safety problems in the modern NHS is hospital infection – an issue which is easily avoided by good staff training, modern equipment, good funding for cleaning services, and a culture of patient comfort rather than patient endurance.

Waiting times: The other big problem in the UK, partially but not entirely related to the first, is waiting times. The waiting time target for non-emergency surgery in the NHS is 13 weeks, and it varies significantly depending on the area you live in. Waiting times aren’t quite the horror story that people make them out to be, but they are a significant cause of discomfort, alarm, and sometimes death, and it’s not very nice that they’re so long, although in reality most British people when surveyed indicate satisfaction with their own waiting time – while it’s a good idea to campaign for instant access, everyone understands that reality interferes with a good political story and it’s okay to wait a few weeks for non-essential surgery. But waiting times in the UK are too long and seem to be related to inequality, with poor people in general waiting longer even though the system serves everyone equally. A large portion of this waiting time effect may be caused by inefficiencies and confusion within the system, however, not by underfunding, and it’s possible that they could be reduced by better service provision.

Why the Tory reforms won’t work

So having looked at that, let’s see what I think will happen when the Tory reforms are introduced. In the broad, I think they won’t make as much money as the Tories claim for the hospitals; they will create a set of winning hospitals through luck and connections; and they will exacerbate Britain’s (already woeful) inequality in health outcomes. In order, then…

They won’t make the money the Tories claim: The Tories are going to open hospitals to allow more private fee-payers, and it seems like the general idea that the hospitals have is that they will attract health tourists, rich people from Europe and the Emirates who want to come to the UK for treatment based on the NHS’s excellent reputation. Unfortunately, most UK hospitals, having been underfunded for years, are not in a position to compete with most hospitals anywhere else in Europe or America, either on their presentation or the quality of their service. They don’t have enough beds or up to date equipment, and they look nasty. Also, the UK has a very unfavourable exchange rate for exporting what is essentially a highly-skilled service, in competition against, for example, German or Australian hospitals. They may be able to argue that their English language base is an advantage (how many Arabs speak German?) but I don’t think this will work so well in their favour – a large proportion of doctors in the English system aren’t native speakers, and in any case Germans speak English better than the British do, and far more politely. They may be able to trade on the NHS’s reputation, but a reputation in the press is very different to the kind of reputation your hospital needs when a rich Arab starts investigating the actual rates of success in your hospital and discovers that they’re below EU standards, and in some cases criminally poor. In order to compete on this market your hospital needs to:

  • be more than just presentable
  • have very good hotel facilities
  • have very low infection and death rates, and high success rates

which is not generally true for British hospitals. So I don’t think that it’s going to draw in as many health tourists as the hospitals expect, except for a small number of lucky or politically-connected hospitals (see below).

Finally, the market they’re aiming at is small, while in the UK there is a large potential market of middle class baby boomers who are worried about their health, are willing to use the NHS and respect it greatly, but would really like to pay extra to jump the queue and/or get better facilities, especially private rooms and better food. Unfortunately, these people don’t have the money to pay upfront and don’t have a culture of private health insurance, and the government won’t fund them if they pay privately. So, it seems to me that there is a large untapped market in the UK that the hospitals could tap if there were significant reform of the UK’s funding structure. We’ll come back to this…

They’ll create winners and losers: Winners and losers being, of course, inevitable in any society based around markets, but in this case – just as in the Soviet Union – the winners won’t be the people who work best in the market, but will be a cadre of lucky and/or politically connected hospitals. The lucky hospitals can be divided into two camps:

  • Those in a region of high wealth and good health: The UK has extremely unequal health outcomes, and they’re very regionally based. Wealthy areas have more hospitals and GPs, and far better health outcomes than poor areas – up to 10 years of extra life expectancy. Famously, every stop you head west along the Jubilee line in London grants a year of life expectancy, and in general the further west you go the better is the infrastructure, the wealthier the population, and the better their average health. If you’re a hospital in one of these regions, this means that during that 20 year funding squeeze you had less demands on your services, less pressure to focus on basic emergency funding, and more opportunity to develop staff and skills, and you were much more likely to attract good staff, since the working environment was better. On top of this, the regional funding allocation formula in the UK – in which money is parcelled out to Primary Care Trusts (PCTs – kind of like regional health boards) to purchase services – assigns the money quite unevenly, with a large part of the “socioeconomic” determinant of funding being based on age, such that older areas get more money. But older areas are wealthier, and often have better health outcomes. So many of the wealthiest, healthiest areas in the UK have also been receiving the most funding. These hospitals are in better condition than those in areas of poor health and low incomes, and so are best placed to compete for private money; but they’re also the areas that least need the extra money that their competitive advantage will give them.
  • Those who experienced capital investment recently: NHS funding has been increasing for 10 years but over that period it hasn’t been distributed evenly. If your hospital invested in new equipment and facilities 10 years ago, it’s now old, while a hospital that refitted last year is in a much better position to present itself to wealthy foreigners. A hospital that is about to refit is now in a position to rejig its renovations to suit a market model, while a hospital that just finished renovations can’t reasonably be expected to do further work for years. This is purely a lottery, though it’s likely that, given the nature of Labour’s reforms in the last 10 years, the hospitals that were refitted first were in the poorest areas. This issue has some bearing on the issue of political connectedness…

Some hospitals have extremely well-connected CEOs and boards, who have connections to political parties and health advisory bodies, while some are more parochial, either through distance or political choice. Some are connected to both parties, some to one. If you were connected to the Labour party you probably stood to benefit from their reforms, or at least to know what reforms were coming and to adapt to them. But the most well-connected of the hospitals are the big urban hospitals, whose directors and CEOs are easily able to move through the policy development/think tank/political circles in which one can get an insight into policy development, are in the same clubs as the Big Boys, and have often got university, academic and old school connections to public servants and political advisors. Just as the Party was the main way in which heads of industry learnt about and planned for the changes in the USSR, so these society connections are going to serve hospital leaders in the UK as they prepare for these market reforms. The market plans of the Lib Dems and the Tories were floating around 2 years ago, and no doubt the heads of the big urban hospitals had inside knowledge of what was coming. Is it any surprise that the big Foundation Trust hospitals, which are the ones most able to prepare flexibly for a new policy environment, have been investing heavily in market-oriented developments? Meanwhile, managers of small, poor hospitals outside the London Teaching Hospital hub won’t have the same connections, and the poorer large hospitals in the East of London or the other poor cities, like Manchester, are so crisis-struck and cash-strapped that their management will be too busy managing day-to-day business to engage in the kind of politics that is required to prepare for a big new political change.

This is a natural and unavoidable way of creating winners by dumb luck. It’s the sort of situation which requires a transition period to enable the unlucky but gifted to scrabble their way over the lucky but stupid. Unfortunately, the government has created such an atmosphere of panic over their public debt, that they are able to get away with introducing radical changes without transition periods, adjustment funding, or any of the other arrangements a large, complex and slow-moving system needs to adapt to a radical new policy.

They will exacerbate inequality: It should be pretty clear from the above that through a combination of design, happenstance and history the NHS is set up to ensure that a sudden market reform will benefit the rich and healthy over the poor and sick. The hospitals with the most cash and the best reputations in the wealthiest areas will draw in the most foreign funds, and will then be free to use the proceeds to improve services to their already well-served populations. Meanwhile the government will use the new revenue as an excuse to squeeze funding on all hospitals, which will fall disproportionately on those in poor and sick areas because a) they can’t make up the shortfall and b) UK government funding always benefits rich areas more than poor areas. The most obvious way in which this is going to happen is waiting times. Hospitals in wealthy areas are working at below capacity in beds and theatres, and can absorb a small number of wealthy private payers without much effect on their waiting times, while those in poor areas are working at near full capacity and can only accept new payers by dumping a non-payer from a bed, and blowing out waiting times[5]. It’s worth noting that even the wealthy hospitals, if they react too quickly to fill up spare beds with paying patients, risk lowering quality – it’s apparently something of a mantra amongst hospital managers that optimal outcomes occur when you run at 80% capacity, and I’d wager there are very few hospitals in the UK that can manage to take on patients and stay near this mark. But this problem will fall disproportionately on the poorer hospitals, which will then naturally give up competition for private patients (if they ever had any chance of pulling any in the first place – areas like Lewisham and West Ham are not exactly the places wealthy health tourists are going to be visiting for a quiet week of R&R). Once the hospitals give up this competition (or fail at it), they will become poorer still and inequality will increase. The UK does not need more inequality in health outcomes.

What should the NHS do?

In my opinion, the market that the NHS should be developing is not the supposedly lucrative health tourism market, but the much larger, lower profit local market for improved services to middle class British people. It’s a sad fact that money buys better health, and especially in the UK, but it’s an even sadder fact that after 50 years of eschewing markets the UK has failed to address very high levels of inequality. Given this, and the poor health outcomes experienced by British people generally, it’s probably time to recognise that the NHS model is flawed and move it to the mixed private/public model that works best in every other industrialized economy (except the US and Switzerland). This is best done by opening up a market for private services, as follows:

  • set benchmark fees for services provided by hospitals (this is already underway in the NHS, and was due to be completed soon) that are sufficient to cover the costs of the service under ideal conditions plus an amount of money sufficient for a cash-strapped hospital with good management to use the money for expansion/investment over time
  • allow private hospitals to compete for this benchmark fee when providing services to eligible citizens, and to then top up the fee from private insurers. This model offers a significant benefit over a model in which private hospitals provide the whole service to privately-insured patients outside the public system, because it makes the private insurance affordable and enables the private hospitals to compete essentially for a middle class market through offering NHS-standard medical care with additional hotel services and faster access as the main selling points. A private insurance model where the private insurer covers all the costs of the service is both highly expensive (as we have seen in the US) and completely incapable of establishing a decent foothold in a country with an established universal system; but a model offering queue jumping and better hotel services is cheap and easily able to compete, provided it can get that block grant for the medical care
  • allow public hospitals to compete with private hospitals for these private patients, but establish certain conditions for their entry into this market – minimum waiting times or infection control achievements are two obvious examples – so that even if they’re tempted to skimp on care for the public patients, they’re already skimping on a high standard
  • allow public hospitals to close services which aren’t profitable, to merge with other hospitals, to establish new hospitals and to engage in partnerships with hospitals and GPs, to set up innovative systems for providing the same services at lower cost[6].

All of this needs to be developed slowly, and first and foremost the poorer hospitals need to be given significant capital grants to develop their service capacity. A lot of innovative thinking needs to go into ways of improving both the infrastructure of the British system and the workforce, which has been slowly decaying under 20 or 30 years of no planning and no development. The Labour party made big inroads into redressing the infrastructure problems of the NHS, but they neglected workforce development and they didn’t fund it up nearly fast enough. Without improving those two aspects of the NHS, it will never be able to compete internationally, so won’t make the money the Tories expect; and it won’t be able to provide better service to UK patients regardless of its private activities.

The model I’ve proposed above is essentially an extension of the Australian model for GP services to hospitals in England. It’s also roughly how the German and Japanese systems work, I think. It’s high time the NHS modernized and allowed the increased investment, competition and efficiency that comes with increased private investment, without risking further failings in health inequality. Suddenly opening up the hospital network to rich private buyers is not the way to do this, and won’t have the benefits the Tories envisage, but will have significant disadvantages.

Update: Paul in comments has suggested that this policy could reduce inequality if it came with a redistributive mechanism (e.g. 50% of all profits go to poor hospitals). The NHS already has a supposedly redistributive funding model, in which resources are allocated to PCTs under the weighted capitation formula, and private income could easily be factored into this formula to reduce the amount of government money that PCTs with high-performing hospitals receive. This wouldn’t be a very effective redistributive mechanism because the funding allocation includes a large pool of non-hospital funds, so it wouldn’t make much difference to the overall allocation to the PCT, but it would create some level of redistribution and thus could, in theory, reduce inequality. There are three problems with this (rather hopeful) analysis:

  • This seems to be a health-specific version of the new labour model for funding welfare – get lots of money from rich foreigners in finance, and use it to swell govt coffers to give to the poor. We can see where this has left Britain
  • The Tories are all about localism, and have been threatening to do away with the capitation formula (I think). They’re much more inclined towards letting hospitals keep the money, and towards funneling money directly to hospital boards. This kind of localism in the UK is what has given rise to the charming “postcode lottery” and is historically part of the reason for the area-based inequalities in the UK. Any model that reproduces this in health is not looking rosy in historical terms
  • The weighted capitation formula is what I was thinking of above when I mentioned that historically, government allocation of funds has tended to benefit wealthy areas even when it claims to be adjusting for inequality. Redistributing through this formula won’t work until the formula is rejigged. My personal theory (and I was going to write a paper on this but didn’t get a chance, but may return to it this year or next) is that allocating money to areas on the basis of their difference in health from a mean standard (the formula uses male life expectancy of 70) does not work to reduce inequality where the stated goal is to draw the area’s mean health towards the standard. (What follows is theory I aim to test through simulation): This is because the most efficient way to spend the money to get your area closer to the standard is to spend it on the already wealthy and healthy. You can lift a mean life expectancy in your area by spending money on everyone, by preferentially targetting the poor, or by preferentially targetting the rich. The most efficient use of your money is to do the latter. The best way to reduce inequality per se is to assign money to areas on the basis of health need (e.g. difference from the standard) and then penalise them for inequality measured on the Gini Index (or some other measure of disparity within the area). The areas will get more money next year by raising the standard of health in their area and reducing inequality[7].

The last point in this set of concerns also serves to show (maybe) that “targets” can be implicitly inequality-increasing. If you set a strict target to a hospital of, say, 6 week waits, and penalise them for failing to make that target, they will naturally find the most efficient way to avoid the penalty. And in almost every aspect of health care, the most efficient method of doing something is to focus on the rich and kick the poor out of bed. So if your concern is inequality, and you also really need to force your non-responsive healthcare system to respond to some sensible targets, then you need to very carefully balance the healthcare standards (e.g. waiting times) with inequality standards. New Labour didn’t do this, but I think the main reason is that the discussion of how to fix inequality at a system level has been very poor[8]. Had I stayed in the UK for another year I would have done something to add to this debate.

fn1:The main reason for this is that the health system is complex, and there is no longer a strong ideological driver in most countries for maintaining government control of all forms of healthcare. As a practical measure, government control of large swathes of the insurance system and the major hospitals is essential; but equally practically, without significant private investment and activity, the system becomes inefficient and unresponsive. The most obvious example of private partners of a public system are General Practitioners, who in Australia are properly private entities, receiving money for services from a government insurer. In Japan and Germany hospitals are also often private providers receiving money from a government insurer.

fn2: I understand that the British have a lot of reasons for hating New Labour, though nowhere near as many as the Iraqis have; however, one thing that makes me sad about their demise is that they will never receive credit for the sterling work they did rescuing the NHS.

fn3: Actually, I think this is a problem in the UK in private as well as public spheres. You can see it in Heathrow, the railway stations, and any cafe anywhere – even US imports like Starbucks – and of course in the filthy, squalid pubs. There is a general attitude that people will tolerate under-investment and a continual squeezing of the little details that make life presentable, like cleaning the couch covers or sweeping the floor. And of course, everywhere, you have to wait. Why invest in a second espresso machine and another Polish worker when everyone tolerates queuing? That Polish worker costs 3.50 an hour[4] that the boss can pocket…

fn4: I know, the minimum wage is 5.73, but no-one earns that in cafes and pubs. Note the difference between Australia and the UK here. The basic unit of daily living – a unit of beer – costs 3.30 in the UK, and staff get paid maybe 20% more than it. In Australia it costs about $5, and staff get paid about 250% more than it.

fn5: There is a sense in which this isn’t strictly true because we know waiting times aren’t entirely caused by capacity constraints, but are also caused by poor management, inefficient use of resources, etc. But you don’t get to a 13 week waiting time simply by mismanaging a list – there are structural issues involved here too.

fn6: For example, some hospitals in semi-rural ares are considering joining together to establish offsite consulting rooms for specialists, and rotate the same specialists through all their facilities. This is a huge benefit because, in order to lure a specialist to your hospital you need to be able to offer them a certain minimum number of days working on their specialty. If you need the specialist for 1 day a week but they want 3 days of specialty clinics, you have to open 2 days worth of clinics that are used inefficiently. But if you have 2 other hospitals in the area who also need that specialist for a day a week… this is the sort of thing private organisations handle well but public ones tend to have been pretty poor at adapting too. It doesn’t have to be this way, if the hospitals are freed up to be able to make changes to their services

fn7: Note that the funding model in which areas further from the standard get more money assumes implicitly that receiving the money is not an incentive, because if so they would depress health to get more money. You can get around this by including a component of incremental improvement, so an area gets more money for big improvements in health relative to last year. But essentially the funding model assumes that everyone’s main goal is to improve health, not get funds. This is possibly one of the problems with block-grant-based health funding models. I really should do more work on this!

fn8: Incidentally, none of what I just said should count as an argument for or against targets by me. I don’t generally approve of them, but I don’t have strong opinions either way. If that’s what your healthcare culture responds to, then by all means, jackboot-to-the-head. I don’t think that doctors, nurses and healthcare administrators do respond best to targets; but I didn’t work at the coalface of an English hospital so I could be wrong.