Thursday, August 13, 2009

Privatising the NHS - how much are you willing to pay, and to whom?

Alright, so I've been a mite mean to Charlotte and Sara although, if you make trite comments, you do risk retaliation. However, I promised some thoughts of my own, so here goes...

It is said that you get what you pay for. In healthcare, that isn't exactly true. Does 15.3% of US GDP purchase a healthcare system that is 84% better than that of the United Kingdom (8.3% of GDP)? Almost certainly not. Yes, there are other factors - the increasingly vast burden of medical malpractice insurance, for example - but it isn't the amount of money you throw at it, it's the effectiveness of how you use available resources.

Across the OECD nations, an average of 73% of healthcare spending is funded through taxation, a figure doubtless depressed by the US data (putting the statistic into context, Luxembourg, Slovakia, the Czech Republic, Sweden, Denmark, Norway and the UK fund 85% or more of healthcare spending through taxation). There are very few examples of privatised healthcare in the developed world, so the only model in existence which demonstrates how effective a predominantly privatised healthcare system can be is the United States.

It would be foolish to assume that the US healthcare system has reached that nirvana of perfect efficiency. However, if we assume that additional spending, sufficient to bring the proportion of GDP spent up to the US level, was required, we would be talking about an additional spend in 2006 of £72.6 billion (average exchange rate for 2006 was £1 = $1.8424, 2006 GNP was $1911 billion). Frankly, that isn't going to happen, especially if you try to explain to people that they'll have to find that figure - approximately £1,200 per person - themselves, with no tax refund available to offset it.

Alright, we need to bridge the gap. There are large amounts of waste in the US healthcare system, which manifests itself in three ways:

Choice requires spare capacity

Choice. It's wonderful. However, privatisation only gives you choice without rationing if it allows spare capacity. That spare capacity costs. Extra doctors, nurses, cleaners, scanners, ambulances, wards, how much money does that cost? You have to maintain these things unless you assume a constant and even flow of customers, an unlikely occurence. Without the spare capacity, you are rationing by availability. If I'm paying extra each year, I'd like to be seen at the time of my choosing, I think. Otherwise, what am I getting for my money? Besides, spare capacity eats into my profit margin as a supplier of healthcare services. Why should I provide spare capacity? Let someone else do it!

Bureaucracy costs, it always does...

One of the burdens on the American patient is that of the bureaucracy of billing. The hospital bills the insurer, who quibbles a bit - was this necessary? Our expert thinks not... An exchange of views follows, all of which costs. In fairness, we've experimented with charging here in the UK, and succeeded in creating a bureaucracy to compete with any the world over. I'm yet to be convinced that public health has improved as a result though...

You don't think that we're going to give you a chance to sue, do you?

American healthcare is, in terms of equipment, what French healthcare is to the pharmaceutical industry. They've got a lot of kit, and they're going to use it just in case. in 1992, an admission to hospital for what turned out to be a really bad migraine cost an unlucky insurance company approximately $7,000. We never did find out what caused it for certain... Someone has to pay for that and near-certainty doesn't come cheap...

So the difficulty for our friends in favour of contracting out healthcare is in squeezing the gap between the cost of a free market and that of predominantly state provision. They've jeopardised the benefits of economies of scale, failed (thus far) to convince the people who really matter (few of whom will be reading this posting) that rationing by resourcing, the increasingly disguised British approach, is less good than rationing by availability. Yes, they come down to the same thing, but the former is in the hands of the public through democratic accountability, whilst the latter is biased towards the provider in the absence of functional collective bargaining.

Conclusion? I'm obviously opposed to any move to privatise the NHS. Actually, no. I'm just unconvinced that privatisation can provide tangible improvements without greater infusions of money, regardless of its source. But I'm not finished yet...

Hattip to James Graham at the Social Liberal Forum for pointing me in the direction of some useful statistics...


Julian H said...

"so the only model in existence which demonstrates how effective a predominantly privatised healthcare system can be is the United States."


The US system isn't really private - around half their spending is by the state, the system was born from government intervention (wage caps) and has been managed through government regulation ever since.

Mark Valladares said...


It's going to be very difficult to build a case on a country so small that it can be universally served by a three line Metro system, especially when that country is run by what some people would consider to be a repressive quasi-dictatorship.

The difficulties caused by regional variations, by distance to facilities, and by the existence of well-organised lobby groups are not, and need not be, taken into account by the Singapore system.

Now that's not to say that there is little of use to us in terms of possible reform. However, you need rather stronger evidence than an isolated example to convince the sceptics...

Tristan said...

Okay, read this

The US system is far from private, and even further from free market, stop trying to claim it is.
I also know nobody who says the US system is perfect, or that it should be implemented here, so stop trying to claim that.

As for economies of scale - they're only efficient thanks to tax payer's money being spent on them to externalise costs.

Choice: Requires multiple providers not spare capacity. The free market does not ration, that is what governments do.

Bureaucracy: It costs, but is it needed? Certainly not to the extent that we have it now - its only sustainable due to the constant infusion of tax money.

Suing: That's a problem with the legal system, not private health care. And it is a problem.

A private system, in a free market, would produce far superior outcomes with the added advantage of not being based upon taxation and the whim of politicians and bureaucrats.
It would not be perfect, there would be failings, but you can't claim there are none in the NHS can you?

Mark Valladares said...


At what point did I describe the US system as 'free market'? I used the phrase, 'predominantly privatised' because most people would recognise it as such. And I'm not suggesting that anyone has called for its introduction here. Given that the debate centres around a comparison of the two, I'm merely looking at the contrast.

A free market comes with costs, and anyone denying that is attempting to delude. If those costs, transitional or long term, generate a perceived improvement in healthcare, then objections are likely to be few. I'm still to be convinced that the political theory that you espouse can actually be made to work when you add the spoiler of real people behaving cynically for personal advantage.

Economies of scale don't exist solely due to taxpayer money, they arise from increased flexibility in the way that resources are applied. If you have one staff member and they fall ill, you will need to bring somebody in to the organisation to cover their work. In a larger group, you might be able to spread their duties between ten individuals temporarily, all of whom will know what the job entails and the issues that apply. If every Parish Council has its own dustcart, a piece of equipment is likely to sit idle (and economically non-productive), whereas if they club together to buy one between them, the cost is lower, and the asset is more productive in itself. If you're going to construct your own straw man, do at least award me the respect of doing a half decent job.

Choice requires multiple providers not spare capacity. No, it presumes that both exist, as a free market maintains no mechanism to precisely match demand to supply. Without spare capacity, the worst provider in the market survives due to the absence of competition. If a better provider increases the availability of their product, there will be a period whereby supply outstrips demand, until the weaker competitor is driven out of the marketplace.

Bureaucracy. Given that the word is used perjoratively, you could reasonably assume that I am being ironic when I refer to a bureaucracy that can compete with any. The following line is a clue. Gosh, are you libertarians all so humourless (Jock, count yourself excepted)?

Finally, you will note that I haven't finished yet.

I'm really disappointed with your response, Tristan, as I thought better of you than that. Your lazy assertion that a privately-run free market healthcare system is inevitably better denies the role that a public sector provider can play in a free market. Or does the public sector have no place in your vision of a free market?

Jock Coats said...

Okay, it's my turn! Before I start though I'd just like to say that I've spent much of my spare time recently listening intently to the podcasts of the Mises University 2009 fortnight lectures. And for a bunch of already humourless academics most of the lectures have been extremely humoured filled, and got laughs from the audience...:)

Now, choice and capacity. The market does have a very accurate way to plan for capacity - it's called the price mechanism and the profit motive. Neither of which the state run system can possibly have.

Think of these two scenarios. The private system. If lack of capacity means that a facility gets a reputation for unreliability in meeting demand it will lose custom and so profit. It may choose to hold spare capacity as a cost so that it can maintain that reputation. Alternatively if someone sees another firm making a decent profit (remember in the market profit is actually a signal that it is working inefficiently since clearly a lack of competition is keeping prices artifically high). It signals that the investment by a competitor would reasonably result in a return and so he will invest. These need not actually mean huge investments - sure a hospital is expensive in capital terms, but you could think of ambulances as three partner firms with a wagon and some kit. A GP as someone who sets up at home to start with. Also remember that they need not be providers of everything - the beauty of a free market over a monopoly system is that it can be a network. The private hospital and GPs may benefit from a number of local suppliers competing with each other - say on scans, or processing scans or after-care beds or staffing banks, much anything really - and pushing down profit and pushing up quality.

When I was last in A&E I waited four hours to be seen and then four hours for a radiologist to come in for an X-ray. When I went back for treatment the orthopedic doctor ordered a CAT scan, which was booked for a whole week later.

The publicly managed provider however has not been terribly good at capacity planning either. After years of neglect waiting lists had risen to what, 18 months in some cases in 1997, then for the first time in decades a government decides to have a massive spending splurge. We got stories of seriously ill people being driven across the country to find a suitable bed and so on. Bound by competing demands on tax they had driven quality down over decades till it was a real political issue. What did they do though? They built using strange financing deals that are now threatening to cut deeply into hospital budgets to repay at a time when there's little prospect of morel tax money for the next few years to maintain the standard of care again. This kind of splurge and decline investment is really bad planning.

Now just a word on this in the American system - there is huge rent seeking and lobbying on the part of hospitals, insurers and others to restrict competition, driving prices up and quality down. Doctors are, what do they call it, accredited?, to a particular hospital; hospitals lobby to get restrictions put on so that another cannot open within a certain distance and so on. Doctors lobby groups ensure there is always an undersupply creating an artifical economic rent using state run monopoly licencing systems, prevention of overseas people practicing, restrictions on training places and so on.

The sort of network of providers I mentioned above would indeed rely on a really free market and I believe you could see some great innovations; more small scale local hospitals providing more personal care (probably for a shorter time as a result as people recuperate more quickly) calling in surgeons from Hackett and Stitch Cardio UK Ltd and scans from U-see Flying CATs Ltd pretty much on demand.

But enough on that bit...I'll look at economies of scale in the next one...

Jock Coats said...

Okay, so economies of scale and bureaucracy (versus inflexibility), hopefully a bit shorter this time!

First, there's this received wisdom that large size will more or less always yield economies of scale. In Kevin Carson's latest book, "Organizational Theory: a Libertarian Perspective" he is convincingly convincingly critical of this assumption.

Indeed it could easily yield inflexibility instead - with central bureaucracies doing vast deals with suppliers (now enshrined in EU competition law of course) cutting out again the possible network of local suppliers. Imagine you are a small spin-out company from the University in Oxford making new prosthetic limbs locally. You don't have the capacity to bid in the Euro-tender to supply the whole NHS so you miss out completely, and the users of Oxford's Nuffield Orthopedic Hospital miss out on the latest bit of technology to boot, and a local producer, employing local people and even bringing in money to the local education system loses out to Peg-Leg International SA. Same goes for drugs. Innovation and competition spreads quality improvements.

On staffing too - one of the best business ideas I never fulfilled I reckon was the idea of a co-operative medical staffing agency. Where the government spent millions trying to persuade ex-nurses to return to the job actually these are the very people for whom job flexibility might very well be a god-send. Such flexibility of course also helps spread best practice

Again, on the American side, there is justifiable criticism about the claims bureaucracy. Again, rent seeking comes in. If you are forced to insure against lots of different conditions (and states can mandate their HMOs - who can't operate cross-state remember too to include different things in one state and another) you are less likely to have experts who might know off-pat the relative costs of particular treatments. But it is also difficult to compare. In the NHS system, the income magically comes from a transfer from HM Treasury - so the costs of collecting that money are externalized to another government department (HMRC) - so we can add another one and a half percent to the NHS costs.

Also, there are network opportunities here too - perhaps competing firms of medical insurance assessors handling claims for multiple hospitals and multiple insurers, again competing to drive down prices and increase the quality of decisions.

You’re certainly right to highlight the costs of potential malpractice suits. One of the recommendations in the C4SS essay I blogged about is that in true anarchist restitutional justice principles punitive damages ought not to be permitted, with awards restricted to actual restitution for the harm done. It is surely punishment and incentive enough that in a world of competing practitioner licensing a persistently careless, negligent or simply incapable practitioner would never get accreditation and would have to resort to selling burgers or something instead.

invict2007 said...

I have been following the American health insurance reform debate closely for my own blog, and I have read many stories of the experiences of those who are unable to afford quality health insurance cover with horror.

Regardless of what is proposed for the NHS in future, the American route is not one Britain should even consider going towards.

Under current arrangements the publically funded health systems such as Medicare in America is sending State and Federal budgets through the the roof, which is now 17% of GDP. Costs continue to escalate as profit is put before the care of the patient with ever inflated medical bills by the private corporations.