U.K. HEALTH REFORM

Before last year's general election, David Cameron promised to ring-fence spending on the National Health Service, even though it was well-known that other public spending programmes would be getting the post-election chop. However, any impression the electorate might have had that healthcare would not be touched by the new Coalition Government has been dispelled by its plans to shake up the way the NHS is run. Roughly 60% of total spending will be taken away from Primary Care Trusts, local bodies essentially charged with purchasing healthcare from providers for the populations within their area, and giving it to general practitioners, the doctors who are the gatekeepers to the whole healthcare system. PCT's would then be abolished.

Back in 1988, Margaret Thatcher unilaterally announced a fundamental review of the NHS. As a young Treasury official assigned to the review team, I was naturally excited at being involved in such a cutting edge policy review. Until I was put to rights by a rather laconic economist on secondment from the Ministry of Health, who cheerfully told me that he was on his fourth fundamental review, and fully expected to see a few more during his career. He also told me that he would accept virtually any reform of the then system, except one; GP budgets.

Having budgets for people who are responsible for taking spending decisions is, in principle, a very good idea. However, as recent events in America and the E.U. have clearly shown, two things need to be present to make them work. The first is credible sanctions if the budgets are breached (I personally don't consider shutting down the Federal Government a credible sanction). Since the Coalition has already said that there will be no sanctions against GP's who breach their budgets, a major building block is missing. Indeed, it is not at all clear at the moment what would happen if a GP overspent. Note that this could be for both good and bad reasons. An example of the former would be if a new diagnostic machine were purchased, which could bring long-term savings, but which was not in the budget at the beginning of the financial year. An example of the latter would be if the GP were simply hopeless at matters financial.

The second requirement for budgets is to have skilled people running them. There are not many people in the U.K. healthcare system, who believe that GP's are underutilised, so when exactly would they find the time to manage them? And if you are a 60-year old doctor, who has never had to run a financial or legal system, how likely is it that you will be able to navigate your way through the morass of financial data and contracts that the current structure generates every day. True, some GP's already work together in large practices, that may well have someone with a financial or commercial background; but many don't, and what then? The chances are either that doctors will send patients to the people they have always sent them to (so where is the freedom of choice for patients?) or they will hire one of those newly laid-off PCT managers to do the non-medical bits for them (so where are the efficiency savings?). In the meantime, there will be huge costs involved in such a large managerial revolution.

The Coalition retorts that it is merely trying to improve the market mechanisms within the existing structure. But the big problem with healthcare systems the world over is that they suffer from two crucial market failures. The first is that what consumers want (demand) is good health; what the system hopefully delivers (supply) is good healthcare. In many cases, good healthcare leads directly to good health; childhood vaccinations, for instance, or fixing broken bones. But in a sizeable minority of cases, the healthcare provided does not lead to good health. This is not necessarily because it is not good, though that does happen (one vaccination in a zillion causes a horrible reaction, a bone is sometimes set wrongly). But mainly because quality healthcare doesn't guarantee good health. Some people recover from cancer, some don't; many illnesses can't be cured, but merely contained; some medicines don't work on some people; and so on.

The second market failure concerns the development of new technologies. In most markets, technological developments tend to lead to reductions in prices, even though demand rises; think of reductions in unit transport costs throughout the ages, or reductions in unit communications or computer costs. But in healthcare, technological developments tend to lead to increases in prices. Saving a baby born at 26 weeks costs vastly more than saving one born at 33 weeks; giving someone a liver transplant is vastly more expensive than the alternative (probably death). The founder of the NHS, Aneurin Bevan, thought that health spending would fall over time as people's health improved. This was about as wrong a prediction as it is possible to make, since the share of the economy devoted to healthcare has risen in all countries, even as their economies have grown spectacularly. In America, admittedly the extreme example, more than one dollar in six currently goes on healthcare. 

As my laconic economist colleague once remarked, healthcare spending is a bit like a balloon; try and squeeze it in one place, and it simply expands somewhere else. The Coalition is trying to squeeze unit spending by using the standard private sector tool of giving GP's fixed budgets and then expecting them to manage the money more efficiently. However, my prediction is that there would be an offsetting expansion elsewhere in the balloon from administrative costs, as doctors hire financial managers and/or make financial mess-ups that others have to come and sort out.

The Coalition has just announced a 2-month "listening period", where it asks for people's criticisms of the proposed reforms. My advice would be for it to get hold of that health economist, and ask him to write a 2-page briefing note on why GP budgets are not a good idea.

Walter Blotscher