Website of the Department of Health

Introduction

3.1 There is strong national support for the principles of the NHS even though there are concerns about its practices. There are some who have come to question whether the NHS is sustainable at all. They point to the gap between health need and health services. They point to the apparent advantages of other systems for funding healthcare elsewhere in the world. These critics of the health service say that the time has come to grasp the nettle and abandon the NHS model of care altogether.

3.2 Often the alternative prescriptions for healthcare in our country are presented as simple panaceas, rather than subjected to adequate discussion and analysis. This part of the NHS Plan analyses alternative funding models against the twin tests of efficiency and equity. It concludes that the NHS remains a fair and efficient way of funding healthcare, and that it is the right choice for our country.

Main alternatives

3.3 Essentially those who argue that the NHS is not sustainable advocate making one - or a combination - of four reforms:

3.4 Each of these proposals has been examined against two key criteria which should underpin any modern healthcare funding system:

Private health insurance

3.5 When people propose the Government should boost national spending on health, by incentivising individuals to make provision for their own healthcare needs, they normally mean tax incentives for individuals and/or employers for making contributions towards private medical insurance.

The efficiency test

The efficiency test

3.6 This approach is inefficient in five respects:

3.7 First, as a policy its effects are likely to be minimal without a strong element of compulsion. In 1990 the previous Government introduced tax relief on private medical insurance for the over 60s. Despite annual public spending of £140 million on these incentives the numbers of subscribers to private medical insurance rose by only about 50,000 in seven years. This 1.6 % increase therefore had only a marginal effect on the NHS. More recent experience from Australia confirms this analysis. Three years of experimenting with increasingly costly public subsidies totalling £1 billion appears to have merely stopped a long term decline in the coverage of private health insurance. These subsidies have mainly benefited those already with insurance and so far may have added much more to public spending than to private funding.[1]

3.8 Second, using public money to pay for tax incentives diverts funds from the public healthcare system. The cost of providing tax relief to those who already have private health insurance would be significantly over £500 million the so-called dead weight cost. Unless taxes were to rise or spending in another area of government were to fall, that would mean the NHS budget being reduced by the same amount.

3.9 Third, it is misleading to presume that incentives for people to go private saves thepublic sector money. This is because the saving to the NHS is likely to be outweighed by the deadweight costs of subsidising those who already have private medical insurance. A recent report from the Institute for Fiscal Studies concluded that: it is extremely unlikely that the cost of any such subsidy to private medical insurance would be less than the NHS expenditure saved [2]. In other words, switching public funding from NHS expenditure to spending on tax reliefs could reduce health spending overall.

3.10 Fourth, the development of genetic testing will affect the coverage and cost of voluntary private health insurance. Healthcare risks will become more transparent. As a result, premiums will rise to reflect high-risk subscribers likely claims, reducing the affordability of cover, and lower risk subscribers will drop out. The combined effect will be to erode the risk pool on which private health insurance depends.

3.11 Fifth, whether or not the introduction of tax relief increased the overall volume of healthcare it would certainly inflate its costs:

The equity test

The equity test

3.12 Private medical insurance is inequitable. Subsidising private health insurance will use taxpayers funds to expand two-tier access to healthcare, reducing equitable access to needed care. The costs of private health insurance per individual are substantial. For a 65 year old private health insurance costs around 50% more than the equivalent NHS cost.

3.13 Private medical insurance shifts the burden of paying for health care from the healthy, young and wealthy to the unhealthy, old and poor. The cost of private health insurance rises the older and sicker the person indeed beyond a certain age, and with chronic conditions, it is virtually impossible to get private insurance cover. Tax relief for private health insurance by definition is regressive. It offers public subsidies to the better off and is meaningless for the worst off.

3.14 This view is borne out by findings from a large scale research study in the early 1990s which looked at the costs across income classes of healthcare in Europe and America. It concluded that: the two countries with predominately private financing systems Switzerland and the US have the most regressive structures overall& The group of countries with the next most regressive systems are the countries operating the so-called social insurance model, &countries which rely&mainly on tax finance& have the least regressive financing systems. [5]

Charges

3.15 Proponents of patient charges argue that new charges should be introduced for a range of health services to encourage responsible use of resources and raise more revenue for the NHS.

The efficiency test

The efficiency test

3.22 Social insurance systems involve payments from individuals just like tax-financed systems. In the French and German social insurance systems, costs fall predominantly on the employer and employee and so fewer people contribute. An outline estimate from 1997 is that a wholesale switch to funding the NHS predominantly from national insurance contributions would cost an extra £1,000 per employee using the French model of public healthcare funding and about £700 per employee per year using the German model, without any increase in the total amount of resources going to the NHS. These calculations adjust for the different levels of expenditure in the three countries i.e. French and German expenditures are assumed to be reduced to current British levels. At 2003-4 levels of funding, additional costs would be the equivalent of £1,500 per worker per year using the French model and £1,000 using the German model, again, with no addition to currently planned NHS funding.

3.23 Continental social insurance models are less efficient in several respects.

3.24 First, because of the design of the social insurance systems in continental Europe, it is not clear that all of the extra spending is spent efficiently. Cost control under European social insurance systems has been weak because payers have acted as financial intermediaries within the healthcare system but have not played a role in scrutinising the performance, efficiency and effectiveness of the system itself. In the words of the German Head of the Federal Association of General Sick Funds: Germany pays for a luxury car but gets a medium-range car in return and if we dont look out, our medium-range car will soon be without brakes and wheels.[11]

3.25 The French system, despite patient choice, is wasteful in the use of many of its resources. Over-prescribing is common.12 At only 3%, generic prescribing rates are far lower than the 60% found in Britain. To tackle these inefficiencies France and Germany are turning to healthcare management mechanisms which have been in operation in Britain for many years, such as a GP referral based system of primary care.

3.26 Second, in recent years fiscal policy and competitiveness considerations have forced all governments to subject social insurance systems to increasingly tight regulation. By placing caps on contribution rates or expenditure, the national governments in Germany and France now effectively determine overall expenditure under their social insurance systems rather than the social insurance partners. In other words, levels of health funding are increasingly unrelated to the system of raising finance and increasingly related to how much the economy can afford and the level of priority placed on health spending by the public.

The equity test

The equity test

3.27 The extent to which social insurance is equitable depends upon the form of the particular scheme.

Continental social insurance

3.21 There are those who advocate maintaining the current role of public funding but shifting wholesale to a social insurance-based model. This is similar to both the German and French healthcare systems. The proponents of this model argue that it leads to larger shares of national income going to healthcare.

The efficiency test

The efficiency test

The equity test

The equity test

Rationing to a core service

3.28 The fourth solution sometimes suggested is that the NHS should be restricted or 'rationed' to a defined core of individual conditions or treatments. There are several problems with this suggestion.

3.29 First, advocates of this position usually have great difficulty specifying what they would rule out. The sort of treatments that commonly feature include varicose veins, wisdom teeth extraction or cosmetic procedures. The problem is that these sort of services account for less than 0.5% of the NHS budget, and are not major cost-drivers for the future. Instead, the vast majority of spending - and spending increases - go on childbirth, elderly care, and major conditions such as cancer, heart disease, and mental health problems.

3.30 The second major problem is that different patients under different circumstances often derive differing benefits from the same treatment.

3.31 The NHS is not a system under which each patient only gets a fixed 'ration' of healthcare, regardless of their personal need and circumstances. The fact that a patient has previously been treated for one condition will not of itself prevent her or him from being treated for subsequent conditions. If however 'rationing' merely means that it has never and will never be possible in practice to provide all the healthcare theoretically possible, then it is true of every healthcare system in the world.

3.32 The issue is not whether the NHS - just like every other public or private health service - has to set priorities and make choices. The issue is how those choices are made. Under the NHS, treatment is based on peoples' ability to benefit. We are in a period of significant expansion of health service resources. The issue is how to improve decisions about how those expanded resources are used. We can no longer leave to chance decisions about how treatment is provided, how demand is managed, and how costs are driven. National Service Frameworks and the broad priorities set out in this NHS Plan provide the context. The National Institute for Clinical Excellence, supported by its new Citizens Council (see paragraph 10.20) will help the NHS to focus its growing resources on those interventions and treatments that will best improve peoples' health. By pointing out which treatments are less clinically cost-effective, it will help free up financial headroom for faster uptake of more appropriate and clinically cost-effective interventions. This is the right way to set priorities: not a crudely rationed core service.

Conclusion

3.33 There is no perfect healthcare system. Systems worldwide are subject to the same sort of pressures facing the NHS. In Germany, for example, there have been four major health reform packages since 1990, and debate continues about the need for further reform. In France, there has been growing disquiet amongst employers about the costs of the social insurance scheme. In the USA, both Presidential contenders, George W. Bush and Al Gore, are proposing major changes to deal with the problem of the over forty million Americans not covered by health insurance.

3.34 No healthcare system is beyond reform and political controversy. But the way that the NHS is financed continues to make sense. It meets the tests of efficiency and equity. The principles on which the NHS was constructed in 1948 remain fundamentally sound. Its practices, sometimes stuck in the world of 1948, need fundamental reform. Investment and reform are the twin solutions to the problems the NHS faces.

References

1 Hall J, De Abreu Lauenco R, Viney R: Carrots and Sticks - the Fall and Fall of Private Insurance in Australia, Health Economics Vol. 8 No. 8, 653-60 December 1999.

2 Emmerson C, Frayne C, Goodman A, Pressures in UK Healthcare: Challenges for the NHS, Institute for Fiscal Studies, London, 2000.

3 Lawson, Nigel, The View from No.11: Memoirs of a Tory Radical, London Bantam Press, 1992.

4Woolhandler S, Himmelstein DU and Lewontin JP, Administrative costs in US hospitals, New England Journal of Medicine, 329(6) 400-3 August 5 1993

5 Van Doorslaer E, Wagstaff A, and Rutten F (eds), Equity in the Finance and Delivery of Healthcare: An International Perspective, Oxford University Press, 1993.

6 Lurie N, Manning W G, Peterson C, Goldberg G A, Phelps C A, Lillard L, Preventative care: do we practise what we preach?, American Journal of Public Health, 77(7), 801-4, July 1987.

7World Health Organisation, The World Health Organisation Report 2000, Health Systems: Improving Performance, WHO, Geneva, 2000.

8 Stocks P, Changes to health targeting, Social Policy Journal of New Zealand, 1 60-73 November 1993.

9 Anell A, Svarvar P, Health care reforms and cost containment in Sweden, in Mossialos E and Le Grand J, eds. Health Care and Cost Containment in the European Union, Aldershot, Ashgate, 1999.

10 Elofsson S, Unden AL, Krakau I, Patient charges - a hindrance to financially and psychosocially disadvantaged groups seeking care, Social Science and Medicine, 46(10) 1375-80 May 1998

11 'Germany pays for a luxury car, but gets a medium-range car in return' and 'if we don't look out, our medium-range car will soon be without brakes and wheels' - Hans Jurgen Ahrens quoted in Suddeutsche Zeitung, 17/18 June 2000

12 The French system, despite patient choice, is wasteful in the use of many of its resources. Overprescribing is common - OECD, Economic Survey 1999-2000, France OECD, Paris, 2000