Monday, March 21, 2011

Alternatives to the Lansley plan

One of the problems for those of us that oppose Andrew Lansley’s health reforms is that it’s hard not to sound negative. “Kill the Bill!” is not a constructive slogan. "Here's a better one!" might be more effective.

We need an alternative but most people (like me) haven’t a clue where to find one. Apparently, there are pretty good health systems in France, Holland and Switzerland, even the US system has its good parts. A cursory look at these - courtesy of good old wikipedia - throws up a few ideas about what kind of NHS we might ask for instead.

The main finding is that all those systems cost a lot more than the 7.7% of GDP we're used to paying. The chart above shows how cheap the NHS is compared to other systems (click here for more data).

Another is that no one has really cracked the problem of getting the efficiencies of competition without paying for profits and suffering from cherry picking, monopolies and other market failures. In general, the more competitive systems seem to cost more overall, which must be a puzzle for economists.

Here's what a few of the alternatives look like, in ascending order of cost, and some features we might look to adopt from them for ourselves.

The Netherlands

The Dutch split their healthcare into immediate and long-term chronic care with different funding systems for each.

Immediate care, such as for broken legs and curable sicknesses, is funded by compulsory, strictly regulated private insurance that costs each adult around EUR 100/month (children go free). This takes care of nearly half the nation’s health costs and reduces the nation’s tax bill accordingly.

Long-term and chronic care, which includes care for the elderly, is funded from general taxation and accounts for around a quarter of total health spending. The remaining quarter is funded by a mix of other taxes and private insurance.

Dutch health insurers are not supposed to make a profit on their compulsory health policies and must offer a defined package of cover. Despite this they still manage to compete and keep costs low. They must also charge the same premium to everyone and not turn anyone down on the basis of age, gender, lifestyle etc. To make this non-discrimination work, a government agency redistributes premium income between insurance companies behind the scenes, using a formula that slightly favours riskier people to counter the natural bias against them.

The system is complicated and not free of complaints but, at only 8.8% of GDP, is significantly cheaper than the French and Swiss systems. In UK GDP terms, it is around £10bn more expensive than the current NHS.


The French have a centrally funded universal healthcare system similar to ours but better. It is reckoned to be the best in the world and has the lowest mortality rates. It costs a pricey 9.7% of GDP and rising – a full 2% more than the UK. Bringing NHS spending up to French levels would cost GBP28bn, in UK equivalent terms. Clearly this is not the direction of travel, despite the government’s liking for French health statistics, but gives an idea of what we'd need to spend if we stick with the same system as now.


As you would expect, the Swiss have an intricate, expensive and very reliable system made entirely of chocolate. Like the Dutch, it is based on compulsory insurance but covers acute as well as long-term care and carries an insurance excess of around EUR 600 a year to discourage use, especially among the poor. Despite that it costs even more than the French system, at 11.2% of GDP the most expensive in the developed world after the USA.

Swiss adults must pay up to around EUR 300 a month (Swiss taxes are low so it's not so bad) and pay an excess every time they use a service up to the cap, which can also vary depending on the insurance policy. The excess means users think twice before seeing their doctor as every visit generally ends with an invoice. There is “any willing provider” style choice of private and public service providers. Insurance companies are privately owned but cannot make a profit on basic policies (they can sell upgrades for those wanting a private room and flowers by the bedside). The state picks up the premiums for those on low incomes.

If the next set of reforms after Lansley’s is to bring in universal compulsory health insurance, this could be the system we end up with. In overall cost terms, it would be equivalent to increasing the NHS budget by £50bn.


The US system is the free market end point, with the world's best doctors and shiniest equipment and costs to match. We should be either copying it or avoiding it like the plague, depending on your politics. Its two defining features are insurance and litigation.

Truly private health insurance is costly. According to the annual reports of two randomly selected US health insurance companies, Emblem Health and Coventry Healthcare, around 89% and 85% of premium income is paid out in medical benefits, respectively. In other words, these private insurers add 11-15% to basic healthcare costs just to cover their own admin and profit.

As insurance goes this is actually not bad – I'm told some types of insurance eat up to two thirds of premium income in costs - but 11% of a national health budget is still a huge, huge number. If insurance companies are to be part of the funding solution, they will clearly have to be non-profit insurers, as in the Netherlands and Switzerland.

A financial consequence of moving the NHS budget out of the exchequer is that private insurers will need assets capable of generating £100bn a year or more. This is a whole new asset management industry, great news for beleaguered financial workers and probably the stock market too.

The other big cost is medical litigation. Medical malfeasance, or rather its avoidance and management, adds around 10% to US health spending, according to this 2006 study by PwC. The extra costs are mainly legal fees and damages and so-called “defensive medicine”, where doctors request clinically unnecessary tests to make the insurance companies feel better.

Clearly we don’t want that here. One of the reasons the UK suffers less from litigation culture is that we have a good safety net in the NHS and welfare state. Judges are less likely to award sky-high damages when other sources of reparation are available, especially if the defendant is a public service. Sadly, this approach is already being eroded by small-time litigators and the compensation culture. As austerity shrinks the welfare budget and the NHS is privatised, the worry is that health providers will increasingly be seen as deep pockets for litigators.

If you add up the 10% cost of dealing with medical malfeasance, the high medical salaries and profit margins of private medical companies (which our coalition government estimates at 14%), the 11-15% admin and margin costs of insurance industry, it is a miracle that the US can afford healthcare at all. The fact that it spends “only” 14.6% of GDP on health looks like a triumph of the free market until one remembers that the UK spends only half as much and that US healthcare is, by a country mile, the worst value in the world (that chart again).

Aging populations

All these systems face the common problem of aging populations. In addition to the demographics, people are living longer and families are increasingly sending their elderly relatives to care homes, which increases costs further.

Raising the retirement age seems a fair response to increased longevity and this is already happening via annuity rates and changes to pension schemes. The rising use of care homes reflects a wide variety of cultural, moral and economic changes, from family and cultural traditions to ideas of obligation between generations and changes in lifestyles and asset values.

It is hard to imagine the state taking a position on the home vs. residential care debate (although it has an opinion on marriage) but it needs to plan for costs whoever provides the care. This probably means tax credits for families that look after their elders at home and changes to inheritance tax and capital gains taxes. The key point is that reforming the NHS is not a cure for rising elderly care costs; this will need strong fiscal and social measures.

Of the systems above, the Dutch seem to have the cleanest split between funding for long-term and acute care. This financial flexibility may grow more useful as the gap between them opens up.

Distributional justice

Like finance, medicine is full of informational asymmetries and displaced risks. The difference is that medicine – under the NHS - has strong institutional ethics and a public service ethos. Lansley's reforms could undermine these and their role in making the NHS a moral community, since, as Adam Smith warned, markets cannot be relied on to create a moral community.

To know if this risk is worth taking it would help to agree on what we want out of a modern NHS. We didn’t have much of a debate about the NHS before the last election but we really need one as the distributional ethics of universal health provision seem to be changing fast, especially regarding acute versus long-term care funding.

Events such as the housing and financial booms, credit crunch, recession, education costs and pension reforms have changed the way wealth is distributed between generations and the obligations felt between young and old. It has also seen dramatic increases in wealth inequality, changing the way people feel about their obligations to the state and each other.

Health and social care reform assumes some level of agreement about these. A debate would have helped build consensus on new problems, such as whether illegal immigrants should be entitled to long-term care or just A&E, whether people whose houses doubled in value should have the same subsidy for end-of-life care as those who don’t own a home, whether the wealthy should be allowed to contract out of the NHS or made to keep a vested interest, whether health can be judged purely by cost or also by Cameron’s index of wellbeing, and how the financial crisis has changed our view of free markets and public service, to name a few.

New forms of ownership

A debate could also explore whether new forms of ownership might be more appropriate to public service delivery than private firms. One of the leftwing's worries about "any willing provider" is that health services could become dominated by companies whose interests, by definition, are not the same as the public's.

Matt Leach, associate director at "Red Tory" think tank ResPublica, explains the dangers.
"With cherry picking, you risk costs being left with the state. With monopoly you risk long term exploitation of market position to the detriment of other local players and the procuring agency. Parts of the public sector may favour large scale contracts for reasons of perceived ease of bureaucracy, monitoring, etc, but at a long term financial, social and delivery cost."

ResPublica's idea is for new types of social enterprises to take on the work. In a report on this idea, entitled "The Ownership State", ResPublica director Philip Blond, writes:
We propose a new model of public sector delivery, in which services are provided by social enterprises led by frontline workers and owned by them and the communities they serve. These new social businesses would exchange economies of scale (which are all too often illusory) with the real economies that derive from empowered workers and an engaged public."

The idea is being championed by Tory MP Chris White, whose private members bill Public Services (Social Enterprise and Social Value) Bill 2010-11 is making its way through parliament just behind Lansley's NHS reforms.

White's Bill defines a social enterprise as "a business that acts for the benefit of the community and whose profits are for the greater part reinvested for that purpose in the business or in the community."

It also proposes a social value test in which those engaged in public procurement must consider the impact of contracts on economic, social and environmental wellbeing - a change of thinking for most private contractors.

If so much of the opposition to Lansley's reforms stems from the conflict between private profit and public service, the easiest escape for the government is to redefine AWP so it excludes or severely limits private NHS provision and promotes social enterprises instead.


A national debate and comparison with the health system of another country would have been an obvious and honest way to approach NHS reform but - no such luck.

In the meantime here are a few things we can learn from a quick look at our neighbours' health systems in case we have to decide quickly what we want instead of Lansley's reform:
  • Health systems in other developed countries all cost more than the current NHS
  • Any reform will therefore increase either taxes or private health insurance premiums
  • Litigation and insurance inflate costs massively but can be kept lower if the system is designed upfront to control them
  • Non-profit competition works for insurance, maybe it would for core health provision too
  • Swiss style “excess” insurance is incompatible with the NHS principle of “free at the point of care”
  • French health standards require French levels of spending
  • The Dutch system is relatively good value and seems flexible in dealing with rising long-term care costs, perhaps we should look more closely
  • Rising care costs for the elderly will require fiscal, not NHS reforms
  • Successful health reform needs an updated consensus on matters of distributional justice
  • Banning (or severely restricting) private NHS provision while promoting social enterprises would create competition without the ill effects of privatisation

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