The fiscal future of the NHS: an economist’s rant

As the NHS enters its seventh decade, it is reasonable to ask what its future might look like in fiscal terms; that is, do we have a model that is sustainable under the auspices of public expenditure? To address this question, we need to examine past performance, focusing in particular on the general questions of why health services overspend and whether this really matters. We can then focus more on recent financial performance and review a huge unanswered question-why is it that, despite the largest increases in public funding of healthcare in the UK combined with various initiatives aimed at improving efficiency, we ended up with the record deficits that we faced last year? It is in addressing such questions that a way forward for the fiscal management of the NHS might be seen. Without recognising such issues, and the need to respond by putting processes in place to deal with them explicitly, we raise the possibility of a very different fiscal future-one in which the NHS finances are managed by those who do not take a population perspective of healthcare or, worse, where NHS funding stagnates or declines whilst funding from private sources grows. Of course, whether it is fair to use the word ‘worse’ is not clear. Ultimately, it depends on one’s objectives, and this is where we should start.

Objectives of healthcare financing

We can reform healthcare all we like, and of course it is important to know whether health is improved and costs are saved. But often the hidden key to healthcare reform is who pays and will the health of any groups be disadvantaged. What we think about these redistributive consequences can only be determined by values. If a policy is regressive, it means that the poor will end up paying a greater proportion of the bill than they do now. Some people might find that implication acceptable, as the poor also use more healthcare (and users should pay, should they not?) whilst others will find such an outcome to be unacceptable. This is where the notion of values come in. How do you think such burdens should be distributed? I do not have an answer, although my own views will become clear as this article progresses. However, it is worth bearing in mind that the whole point of the NHS and all such public schemes around the world was precisely to redistribute care towards the poor and costs towards the wealthy. Is this still the case?

One thing that can be said is there is nothing radical about changing this balance and pushing greater burdens for healthcare costs onto those who are less well off. As taxation systems around the high income countries become flatter, in the sense of the rich paying less and less on the marginal pound earned, the burden on the poorer group grows.

Overspending in healthcare

There is no question that overspending in publicly funded healthcare systems is the norm. But how does it happen? The simplest answer, of course, is that health professionals and organisations simply respond to incentives put in front of them. More often than not, and almost always, governments will bail out overspending health organisations. The incentive is, thus, to overspend, but not too much. In addition, such overspends, as a percentage of turnover, are often not that large, so, perhaps, the problem is not too serious anyway.

There is a logic to the above argument. However, it does also involve a certain amount of burying one’s head in the sand. Are we not concerned with how the money is spent?

The answer to this question is a qualified ‘yes’. If governments are not concerned, then why do they continually attempt to reform the system? Presumably, this has something to do with maintaining financial balance whilst providing quality, safe and effective services, as recently stated by the government. One level of qualification enters the argument, however, when pointing out that, depressingly, most economies are not able to put in place a set of incentives to prevent the inexorable march of patients into the most expensive part of the system-the black hole of the acute sector! In Canada, for example, there is a disconnect between primary and secondary care, the incentive being to ‘refer on’ from the former to the latter. In the UK, there are powerful incentives to get people into hospitals. Currently, in England, we have strong providers and weak purchasers. Policy is heavily centralised and relies on non-evidence-based targets. Financially, payment for each case treated combined with large privately financed capital projects to pay off provides a strong magnet for activity and, thus, admissions. If we are going to have ‘markets’, they should not be so imbalanced. This leads to distortion of priorities and, often, a takeover of the weak by the strong, which, for reasons explored later, is not desirable in the case of publicly funded healthcare.

One other demonstration of government concern has been the global pandemic of health technology assessment (HTA) agencies. The National Institute for Clinical Excellence (NICE) here in England and Wales is probably the most well known manifestation.. The qualification here, however, arises in posing the question of whether it is merely ironic that healthcare costs continue to rise in the presence of such agencies which are trying to make the system more efficient. Perhaps it is more systematic in that such agencies usually approve the technologies they have been charged with assessing. Such technologies will almost always have incremental costs relative to what is currently provided, which the HTA agencies do not have to take into account. Thus, it could be argued that HTA agencies present only the façade of dealing with resource scarcity, as they never have to face the trade offs implied by their recommendations.

It could be argued, therefore, that it is not surprising that record increases in NHS expenditure have been combined with unprecedented deficits. Ultimately, no one is really managing scarcity. Different parts of the organisations that make up the NHS will deal separately with the different functions of finance, safety, quality and effectiveness, not recognising that these are all dependent on each other and that we need to develop management processes that take this message on board.

Is there an alternative?

One thing is for sure. The status quo is not an option. We are already discovering this in England, with providers thinking of moving into the territory of primary care. The rhetoric of this sounds good. Such integration of care, as has happened in many parts of the US, would provide a seamless transition from primary to secondary sectors and back again. Of course, in the US no one is concerned with what is best for the overall population, as is the case with hospital providers here. The only body with that responsibility currently is (in England) a PCT and perhaps, it could be argued, national level bodies such as NICE. To avoid hospital providers simply taking over primary care in order to ‘feed the beast’ of the acute sector, we need a framework and approach which has as its aim maximum population health with available resources. The acute sector is not best placed to perform this task, but yet the market is currently rigged in their favour.

Another prospect, of course, is to ‘diversify the revenue streams, such a phrase being political speak for increasing private funding. Depending on one’s perspective, this may carry great dangers. From personal experience, when objections are raised to such policies, a common response of policy makers is "what alternative do we have?" and “is it not right that people should pay as they use the services?”. The danger comes if the objective is that of equity. Payment by use, or even less directly through private insurance, redistributes resources towards the rich and away from the poor, and, consequently, to the less from the more needy.

There are alternatives. The problem is that they pose greater challenges, and are, therefore, more radical than policies which, despite being given the appearance of being radical by those who propagate them, simply involve passing costs onto more vulnerable (and less articulate?) groups in society.

The first alternative, as I have indicated, is to allow health ‘authorities’ to get on with the difficult task of priority setting. Note also that this does not just refer to prioritising new monies coming into the system. Healthcare is full of ‘adding on’ syndrome, where we do not look to get monies for new services from those which already exist. So, by priority setting, I mean genuine consideration of changing the mix of services and disinvesting in some to get at genuine reallocation across service areas.

A second related alternative, but at a more global level, is the issue of how to deal with the known variations in care that exist within the system. These variations either mean that some people are getting too little care or some are getting too much, or both. The implication is that it is possible to get more out of the system by using evidence about best practice (where best equals efficient).

In my view, such agendas should be taken forward by commissioners working closely with NICE, as the only entities in the NHS with a remit for looking after the needs of whole populations. Such groups have come together recently with academics in a series of five seminars, sponsored by the Economic and Social Research Council (in collaboration with the Nuffield Trust and the Health Foundation) and entitled “Managing scarcity in the NHS: building on theory, learning from practice”.One important issue which has been raised consistently throughout the series has been that all stakeholders recognise that real tensions exist between national level decisions and local health needs, and that one missing link in the plethora of recent reforms has been the need to establish more robust processes at the local level in order to bolster capacity for making decisions at this level. The series has also shown how, from experience in the UK and internationally, manager-economist pairs have worked together to develop such frameworks in ways that are rigorous but also pragmatic. If you feel ready to ‘sign up for managing scarcity’ more details of this series are available at http://www.ncl.ac.uk/chsr/events/esrc/ where you can download presentations and reports from previous seminar meetings and find out more about how we now intend to take things forward in a network.

Although one reaction might be that it is politically challenging to work with explicit frameworks for managing scarce resources, surely it is better to have in place processes which can be used to defend particular decisions, which are based on explicit criteria, and to manage this on a smaller scale year on year rather than suffer the periodic but drastic, embarrassing and non-evidence-based cuts of the sort recently faced. Furthermore, having an NHS that is not disproportionately dominated by the acute sector and is sustainable in terms of being publicly funded, crucially depends on getting to grips with managing scarcity.

Cam Donaldson holds the Health Foundation Chair in Health Economics at Newcastle University where he is director of the Institute of Health and Society. He is also a research professor at the University of Calgary. He can be contacted at cam.donaldson@ncl.ac.uk