The equity and efficiency of a free NHS – Cam Donaldson

Just last week, Neil Gray, Cabinet Secretary for NHS Recovery, Health and Social Care in Scotland, stated that he is “open to ideas” about NHS reform whilst vowing that the service would, nevertheless, remain free at point of delivery. I agree with this direction of travel. But it does leave open questions as to the funding basis for the system and whether, if continuing to fund it via taxation, is there any role for other funding sources that proponents might describe as supplemental to the basic system; these being user charges and private insurance, often innocently-promoted as helping to relieve pressure on the NHS and, hence the taxpayer. Social insurance, too, is often touted as an alternative to taxation and could still involve care being free at the point of delivery.

So, let’s unpack this by (re)stating what most health economists would see as a settled case, that a publicly-financed health care system is not only more equitable but also efficient. This is a lesson that has been learned in almost all advanced economies of the world. The case stems from the economic notion of ‘market failure’, the elements of which were first brought together by the great Canadian economist, Robert Evans¹, reinforced by others over the years.^2-4

Before proceeding, there is obviously a valid (equity-based) humanitarian case for a free NHS. However, it is interesting that this case does not necessarily stretch to other commodities, such as food, for which, it could be argued, access is even more of a fundamental human right than access to health care. Yet we do not have a National Food Service. Apart from income supplementation on the demand side and regulation of standards on the supply side, this fundamental commodity can be provided adequately largely through market forces. So, are their additional things about the nature of health care as a ‘commodity’ that makes it different?

Market failure and the nature of the commodity, health care

In most advanced economies, public funding of health care dominates. In the table below, this is portrayed for some comparable countries, showing also that this phenomenon is sustained over time. Some of the recent dominance of public sources of funding lies with the COVID-19 pandemic. But, more generally, the explanation lies in the following three sources of market failure.

Table          Total health expenditure in current $PPP (and % of total which is public), 1990 and 2022

Source: Organisation for Economic Cooperation & Development: www.oecd.org

The failure of insurance

Without government intervention, an insurance market would develop to deal with unpredictable health care needs. However, with financial risks mitigated by insurance, costs may receive less emphasis in the decisions of consumers and providers. Indeed, this ‘moral hazard’ is at the root of the continuing challenge of cost inflation in US health care, exacerbated by administrative costs (of billing and advertising) which further inflate premiums; pricing people out of the market who otherwise would have insured. Several academic papers, notably those of Steffie Woolhandler and David Himmelstein^5,6, have shown that around 30 percent of US health expenditure is spent on administration, twice that of the public system in Canada. It costs a lot to administer the market.

These problems exist in public systems too. But government funding and supply-side controls (limiting human and capital resource) make it easier to keep a lid on costs, despite tensions in controlling some parts of the budget (e.g. pharmaceutical costs).

Lack of consumer knowledge

Markets work well when consumers are well informed, which is not the case in health care. In health care, consumers are protected in terms of quality through (rightly) granting license to practice to professionals with the qualifications to do so. But this inadvertently grants market power to professions, especially physicians, which requires what Evans has referred to as ‘countervailing power’ of government; to negotiate with professions over pay and levels of provision.⁷

Markets don’t care; but people do

Insurance also excludes the less-well-off and neediest. If we think about it, a well-functioning insurance market will tailor lower premiums to those at low risk and higher premiums to those at higher risk. In health, those at higher risk tend to be less-well-off, and unable to afford cover. This is termed ‘adverse selection’ in the sense that those in most need end up facing the highest, and often prohibitive, premiums. Inequalities are further exacerbated in that, with the wealthier now selected into their own part of the market, higher-quality, hotel-like services can be tailored towards them due to their willingness and ability to pay. Although, as indicated above, these outcomes may be thought merely to be the product of a well-functioning market, these types of ‘adverse selection’ count as market failure because people care enough about them to be willing to transfer resources from the rich and more-healthy to the poor and less-healthy; something which markets, with their focus on individuals acting on their own behalf, fail to do and which charitable and philanthropic endeavours cannot come close to making up for.

This ‘caring externality’ is why governments intervene in food markets too. But failures there are not comprehensive enough to warrant going further; in short, food needs are more predictable and, generally, consumers know what they like. It could also be argued that societies could deal with caring through public ‘safety nets’, such as Medicare and the Medicaid systems for vulnerable groups in the US. However, at least pre-Obamacare, this still left around one in six people in the US inadequately insured with multiple tiers of access to health care of variable quality. Even with Obamacare, what the US has still not learned is that taxation is the most effective way to achieve the transfers necessary to ensure 100% coverage of its population for health care and keep administration costs down. Despite the (apparent) startling change in the percentage of health care which is public, much of this is still achieved through private insurance schemes; hopefully reflecting the that the US is still on a journey towards the greater fairness and efficiency achieved in many other advanced economies. 

It’s the comprehensiveness of market failure!

The key point is that, although many readers will recognise aspects of market failure in other goods, there is no good for which market failure is as comprehensive as in health care.  It is all of these aspects occurring together that make extensive government intervention in health care, in our case in the form of an NHS, not only more equitable but also more efficient.

Can we help the NHS with supplemental or alternative sources of funds?

Why not user charges?

A naïve observer would say that user charges could help control costs or reduce frivolous demands on the NHS. However, evidence of frivolous use by patients is hard to come by. What the evidence does show is that charges reduce demand only amongst the poor (and less healthy), have been shown not to discriminate between needed and unneeded care and do not control total costs anyway (as the system simply switches its care-giving powers to those willing and able to pay or those put-off by charges present with more-costly ailments later). This then creates a system with widening inequalities in quantity and quality of provision, much as we see when a large proportion of funding of the care system is based on such charges. Exemptions are possible, but, then, add administrative costs (of billing and collection of funds) whilst counteracting the original arguments for charges in the first place; as the exempt can access care as before whilst the non-exempt can likely afford to aswell.

Why not supplemental health insurance?

Supplementary health insurance is often promoted as having the ability relive pressure on the NHS. Again, there is very little evidence to back this up. Most of the evidence shows the impact to be detrimental with respect to waiting lists in the public part of the system.  The reasons for this are quite obvious. At any one point in time, there are only so many doctors available to provide treatment. If their attention is diverted to the private part of the system this has to be at the expense of the public part. Likely, too, patients left in the public part of the system will be in greater need of care.

Why not social insurance?

We now know that continuous health care reform, often intended to promote greater market discipline, and a constant feature of the NHS throughout its existence, has led to little gain at the cost of significant disruption.^4,8 So, too, I would predict, with the oft-lauded switch to the social insurance systems of some of our neighbouring countries. The above table gives a clue as to why such systems might seem to do better than here in the UK; they spend significantly more. This also gives them capacity to focus more on care out of hospital and in general practice; things that have been eroded here and could be restored without much disruption.

Conclusion

There are many in government, who, as with other goods once thought to be the preserve of public financing and provision, would divest themselves of the NHS if they could. The reasons they cannot are due to the nature of health care as a commodity. As early as 1952, the UK Government proposed an enquiry into the cost of the NHS, with a view to dismantling it. This backfired when the subsequent Guillebaud Report of 1956 declared the NHS as value for money. Despite all health care systems being different in terms of their public-private mix of financing, it is the similarities that are striking; universal coverage is sought and ‘insurance’ is based on groups rather than private, individual transactions. An added benefit of this is that, by everyone being locked in together, more vulnerable and needier groups benefit from the drive towards higher standards demanded by the vocal middle class, who might otherwise vote for permission to opt out. Rather unusually in this modern world, the key to paying for a better health care system is compulsion not freedom. The lesson that publicly-funded health care is more efficient as well as more equitable has been learned by all countries as they seek to move towards Universal Health Coverage, continuously promoted by the World Health organisation since 1948 and reflected in the Table above.¹⁰ Aneurin Bevan promoted the establishment of the NHS ‘in place of fear’ of financial ruin amongst those unfortunate enough to fall sick.¹¹ He was concerned with fairness and equity. Hopefully, the arguments presented here also show that our current approach to funding the NHS, through taxation, is also more efficient than any alternative. All is not rosy in the NHS, but that would be the subject of another blog! However, recent LSE-Lancet Commission on the Future of the NHS has shown that modest increases in taxation are the best way to ensure its sustainability (along with social care) going forward.¹² Alongside the challenges of alternatives and to avoid the continuation, indeed spiralling, of our current NHS crisis, our politicians just need to find the courage to explain the virtues of this to the public.

Cam Donaldson PhD FRSE is the Yunus Chair & Distinguished Professor of Health Economics at Glasgow Caledonian University and Professor of Health Economics at Australian National University

References

1. Evans RG, Strained Mercy: the Economics of Canadian Health Care. Butterworth, Toronto, 1984.
2. Donaldson C, Gerard K.  Economics of Health Care Financing:  The Visible Hand. Macmillan, London, 1993.
3. Donaldson C and Gerard K (with Mitton C, Jan S and Wiseman V).  Economics of Health Care Financing:  The Visible Hand (2^nd edition). Palgrave/Macmillan, London, 2005.
4. Donaldson C. Credit Crunch Health Care: How economics can save our publicly-funded health services. Policy Press, Bristol, 2011.
5. Woolhandler S and Himmelstein DU. The deteriorating administrative efficiency of the U.S. health care system. New England Journal of Medicine 1991; 324: 1253-1258.
6. Woolhandler S, Campbell T and Himmelstein DU. Cost of health care administration in the United States and Canada. New England Journal of Medicine 2003; 349: 768-775.
7. Evans RG. Going for the gold: the redistributive agenda behind market-based health care reform. Journal of Health Politics, Policy and Law 1997; 22: 427-465.
8. Maynard A and Bloor K, Introducing a market to the United Kingdom’s National Health Service. New England Journal of Medicine 1996; 334: 604-608.
9. Donaldson C and Bryan S. Compulsion: the key to successful US health care reform. Journal of Health Services Research and Policy 2012; 17(2): 106-9.
10. https://www.who.int/news-room/fact-sheets/detail/universal-health-coverage-(uhc)
11. Bevan A. In Place of Fear. William Heinemann, 1952.
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