The first suggested reform idea in my series of ideas to reform the NHS will start with this, the most radical. This reform plan presents a way to raise a large amount of money to pay down government debt, expand private and public investment in the health system, make the health system more flexible and accessible, and directly tie hospital funding to health outcomes, without changing the annual cost structure of the NHS at all. It sounds too good to be true, and so it probably is.

As I observed in my post on the current Conservative privatization drive, lack of private providers in the UK health market and central planning of all services are significant problems with the system: they affect the quantity of investment available, the efficiency of investment, independence of investment from political goals, and flexibility of response to changes in health care demand. The simplest approach to this is to allow new private entrants into the market and to fund them just as if they were public hospitals. This is very hard to do under the current system, because current block funding methods don’t work well for contracts with the private sector, and it will take a long time for new hospitals to be approved and built. A faster, simpler approach is to shift all the hospitals in the UK to a fee-for-service payment system (like Medicare in the USA) and then privatize them.

Shifting to a fee-for-service system

Fee for service systems have disadvantages that are well understood, but one significant advantage they offer is flexibility in response to demand. They also make the insurer paying for service able to purchase services from any provider, rather than having to be locked into contracts with specific providers – this potentially allows prices to be at least partially set by market forces. The main disadvantage in a stable health system is that they encourage over-provision of services, which leads to rapid cost growth for the payment provider (in this case, the government) and excessive healthcare attendances for patients – something that is potentially fatal in the case of e.g. prostate cancer. However, despite their disadvantages some systems – such as Japan – that use them have still managed to get good healthcare outcomes with low cost, so they aren’t the end of the world. Shifting a system like the NHS to such a payment process shouldn’t be impossible – in fact they’re already starting to do this in some ways using Healthcare Resource Groups. So let’s assume that this can be done, and all public hospitals can be switched to receiving payment on the basis of a fee-for-service system. Prices are set by the government, and hospitals paid for providing services. In theory there is no service the government won’t fund at a specified rate (we’ll return to this below), so everyone will get treatment. Some hospitals will provide some services at a cost below the price set by the government, so will profit from these; other services they provide at costs above the rate will either be subsidized by the more efficient ones (if the hospital is a not-for-profit) or closed (if the hospital is a private company). We’ll see the latter risk is one of the big problems with a fee-for-service system, but we’ll cross that bridge when we’ve burnt it.

So the essence of this scheme is to shift to a fee-for-service system and then sell off all 200 hospitals in the UK.

Privatizing all the hospitals in the NHS

We want a rapid influx of investment in the NHS, and we want to free up the NHS itself from investing in hospitals, and shift it to being purely a purchaser of services. The fastest and simplest way to do this is to simply flog off all the hospitals. This would potentially raise an enormous amount of money for the NHS very rapidly. The total cost of hospital care every year is about 20billion pounds, I think, spread over about 200 hospitals; that’s 100 million pounds per hospital on average. I think a private company that could be guaranteed an approximate 100 million pound income stream with, say, 10 million pounds a year profit would be willing to invest probably 100 million pounds in a hospital, so flogging off all 200 hospitals would raise about 20 billion pounds. This would be enough money to pay down about 10% of government debt and have 10 billion left over, which I propose be put into a health future fund. This future fund contributes to healthcare research and funding of new investments through its profits, and uses the principal to provide investment loans to the private and public organizations involved in the healthcare market (so that, e.g., if a union decided to buy a hospital for 100 million pounds it would be able to get a loan from the healthcare future fund to do this). This fund would thus support continuing investment in healthcare, and provide grants for research into new treatments as well as emergency funding to save struggling hospitals in the immediate aftermath of the privatization[1].

These privatized hospitals are then paid for their services from the existing NHS budget, which is about 20 billion pounds a year. But where previously this 20 billion pounds a year was split between hospital services and capital investment, now it is devoted only to services. I think this is the equivalent of increasing the hospital services budget by probably 5 or 10% (the amount of the existing budget that was being diverted by the hospitals to investment). Additionally, we have a huge short-term private investment of as much as 10 billion (the maximum value of the loans from the future fund) and then any other investment that the private owners want to put in. Having purchased a 100 million pound a year operation for, say, 100 million pounds, they might be willing to invest a bit more in improvements, I’m guessing.

Even if my numbers of hospitals and total hospital sector budget are incorrect, it should be clear that the privatization would raise a lot of money that, if disbursed between debt repayment and setting up a healthcare future fund, would be of significant benefit to the UK economy and health economy.

Allowing new entrants into the system

Of course subsequent to this privatization the government could also allow new entrants to the system, that would probably set up specialist services in areas where specific services were lacking. These entrants would be able to get start up funding from the future fund, of course, and would be entirely private investment. Thus over time the size of total investment in the health system would grow, and important consideration in improving levels of care in the UK.

A further, more radical entrant into the system could also be allowed: hospitals that charge an upfront payment. These hospitals would be additional to the current complement of hospitals, but would be able to charge fees to their admitted patients in addition to the standard service. They would, essentially, be luxury care centres. Unlike the current system, though, which does not allow the NHS to fund these kinds of providers, the hospitals would be allowed to charge the basic service to the NHS, and then charge only the top-up payment to the patient. Patients could pay out of pocket or cover the co-payment from a private insurance fund. This would allow private insurers to begin covering healthcare in the UK market, expanding the amount of per-service funding (and thus the proportion of GDP devoted to healthcare financing), but without requiring the private fund to cover the whole cost of hospitalization. Funds that have to cover the whole cost of privatization – as happens in America – have to be prohibitively expensive, and will not be able to compete in the British market.

These private entrants would have to be additional to the current complement of hospitals, and clearly labeled as private hospitals. They would need permission from the government to be established, and would only be allowable in areas that have already got a decent supply of healthcare. This is necessary in order to ensure that people don’t have to travel too far to get free care (a fundamental constraint on the NHS). As a result they would be unlikely to ever form a major component of the UK hospital system.

Consolidation and closure of existing services

After privatization, I expect many hospital owners would look at the cost structure and efficiency of their new purchases and decide to shut down some services because they can’t provide them competitively. For example, if a hospital in East London is providing cardiac services it is unlikely to be able to compete with Bethnal Green, and would probably close or restructure those services in order to remain profitable. Over time this would lead to a reallocation and consolidation of specialist services into better, more efficient hospitals, leading to efficiency gains and cost minimization, as well as improved health outcomes. This is very hard to do in the NHS as it is constructed now due to political influence. There is a risk that in the short term at least – until new hospitals are built or capacity is otherwise expanded – that this would lead to a loss of overall service levels, so it would be necessary to require hospital owners to seek permission for closures in the first, say, 5 years of their ownership. It might be necessary for the government to fast-track establishment of new hospitals in order to overcome this problem, which leads us to the possibility that some hospitals would remain in public ownership.

Partial privatization and gradual change

It’s probably best if the biggest and most important teaching hospitals remain in public ownership, so that the government retains some direct power to intervene in the provision of health services and also in the teaching and research capacity of the hospital system. This could include using the proceeds of privatization to build new hospitals, probably specialist, providing specific services in some areas of the country. These hospitals would be funded under the same arrangements as the privatized hospitals, though obviously they would also need some form of block grants in order to support investment and to maintain loss-making specialties that the government believes they need to run for research or market-failure reasons. They wouldn’t be precluded from opening private wings (in fact, their reputation for excellence might make them the best option for starting this process), but they would probably also be held to stricter rules on service provision (for reasons of access and equality) than the private providers.

As a general rule, rapid privatization is a dangerous prospect so the model proposed here might require a long time to complete, perhaps starting with smaller hospitals and building on their experience. Reform of the general practice system to allow private companies to enter their too would probably also be necessary, in order to prevent the primary care system putting a brake on the development of the tertiary system. Gradual privatization would mean that when the really big services were privatized there was less risk of mistake; it would probably also increase the amount of money gained, since flogging off all the hospitals at once would probably require selling them at bargain basement prices. This would also allow the system to be expanded as the privatization happened, convincing the public of the benefits of the process as they see new services open and waiting times drop.

Risks and disadvantages

The worst risk in this system is that immediately after privatization the new owners will close unprofitable specialties without opening new ones, leading to a general reduction in services provided across the NHS. This would indicate either that the NHS was over-stretched and incapable of providing many of the services it was providing, because the prices set on privatization would have been based partially on pre-privatization activity, and may have been set too low if the NHS had been operating massively under-budget for years. There’s also the associated risk that with prices set too low, the new owners struggle to make a profit, go into administration and then have to be re-nationalized. That would be a political disaster of monumental proportions, as well as costing the government a huge amount.

Another possibility is that the closure and reallocation of services will see a massive loss of service provision in poor areas, where profits will be lower. This will increase the inequalities already inherent in the British system and is one of the main concerns of the advocates of retaining central planning in the NHS. Careful choice of which hospitals to privatize will help with this, as will the simple expedient of providing additional funding in some form (block grants, contractual rewards, or special loans) to companies that retain services in these areas. If this risk does eventuate, the government may find itself having to increase the total healthcare budget to support its goals of reducing inequality – but this is likely to be the case in any healthcare system in the UK that is serious about reducing inequality, and although politically unpalatable in the UK it’s essential if the UK ever wants to reduce inequality. Sadly, this is never going to happen (and if it does the money will be misspent anyway).

The final disadvantage of this plan is that it requires the government of the UK – which couldn’t organize a root in a brothel – to manage the biggest privatization of services since the collapse of the USSR, to set a realistic and practical pricing structure for healthcare that is affordable but sufficient to enable private sector organizations to make a profit, to not to squander the result of privatization, to be willing to commit to a 5, 10 or even 15-year long period of massive health system reform (this would require bipartisan support, which is almost impossible in the toxic political environment of the UK) and to be able to sell the whole thing across multiple elections. So to actually implement this program in the UK would be inviting disaster.

The Final Picture

If successful, the final health system that emerged from this reform would very much resemble that of Japan, with an entirely public purchaser of services (the NHS) purchasing services from a largely private market place of hospitals and clinics. Prices would be set by the government at first but could potentially be set purely by market forces in the long term as capacity increased. Because the UK system is more centralized in larger hospitals than Japan, and because our remit requires all patients to be able to get any service free at the point of care, the system would probably have more publicly run providers (primarily large teaching hospitals) than in Japan, and would probably still be slightly more shambolic (due to the lack of private payments). The healthcare future fund would be unique to the UK, and there would probably be a large number of direct grants and subsidies (at least in the short term) to maintain the system and prevent growth of inequality. The final outcome of this process is not unrecognizable in the current range of healthcare systems, though, so it’s not impossible to imagine that a well-run privatization and reform program could get the NHS to this point. And if it worked broadly similarly to the Japanese system, it would be a vast improvement on what the UK has now.

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fn1: I think this would be necessary because even a mind as great as mine would be likely to make mistakes in pricing services or estimating long term service levels