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Britain's National Health Service Embraces a New Faith in Market Incentives

Benedict Irvine
International Policy Network
September 9, 2004

America is undergoing a tumultuous presidential election in which much ink – and much angst – is being spilt on reforming your health care system, the most expensive in the developed world. That expense is driving some policymakers to look with envy towards Europe, and our nationalized health care plans with their rigid cost containment systems. But before they embrace European models, your candidates should take a sober look at what is really happening in European health care. They might be surprised to find that private investment and consumer choice are the new watch-words in European systems.

Nowhere is this more true and more philosophically revolutionary than in Britain. Back in 1997, New Labour's halcyon days, the distinctly Old Labour Health Secretary Frank Dobson ordered NHS Hospital Trusts to have nothing to do with the private sector. And when anyone suggested there were other, better healthcare models, they were dismissed as mad right wingers.

The British public had long been led to believe that the NHS was the best health service in the world. The truth is much more complex.

Since its inception on 5 July 1948, by Labour Health Minister Aneurin Bevan, the NHS has been our monopoly provider of health care, monopoly funded from the income tax black-hole; no individual has any concept of how much is spent on their health care. Patients have had little choice of providers and had to accept what they were given. In case you haven't heard, the NHS is plagued by waiting lists of more than 12 months, and suffers severe shortages of nurses, physicians and hospital beds, not to mention the hi-tech diagnostic and treatment equipment that is essential in modern medicine (LinAcs, MRIs, and CT scanners).

Years of government under-investment in health care has produced serious inequalities in access to care, often varying according to a patient's residence, income, and education. Aggressive, well-educated middle-class patients fare better than poorer ones in the same setting. Overall, Britain's citizens have a shorter life expectancy and comparatively awful cancer, stroke, and heart disease outcomes compared to their OECD peers.

Dobson's scepticism of the private sector was understandable in one respect, as a previous attempt to use economic principles to reform the NHS had not worked as expected. This attempt arose from a visit by Alain Enthoven, Stanford professor of public and private management, to England in 1985, the middle of the Thatcher era. He published a monograph that introduced the idea of an "internal market model" for the NHS; reluctant to spend more and hoping to improve efficiency, in 1991 the Conservative Party implemented elements of the internal market. The core idea of the Conservative's internal market was to allow each District Health Authority to purchase provider services for residents based on quality and market research of patient needs, thereby challenging the monopolistic influence of the hospitals. All providers became independent NHS Trusts; it was hoped they would compete head-to-head on quality and cost for DHA funding. Unfortunately, the conservative's internal market had critical flaws, missing important elements such as adequate information about costs and quality, and the ultimate sanction for bad service in a competitive system – non-competitive providers must be denied funding and close-up shop. There were perverse incentives too; as King's Fund scholar Rudolf Klein has said, instead of money following patients, as intended, patients had to follow the money providers received.

Following Labour's election manifesto pledge, Dobson abolished the internal market in 1997. But by 1999, Labour's gambit had run its course and the NHS was obviously not improving. In 1999 Enthoven returned to Britain. He asked whether it is possible to create and sustain a culture of innovation, efficiency, and good customer service in a public sector monopoly where demand exceeds supply and where individual units do not get more resources for caring for more patients. Enthoven's question was rhetorical but, nonetheless, powerful. Labour, smarting from sustained terrible media coverage of the NHS, knew he was right.

By July 2000, new Blairite Health Secretary Alan Milburn declared his intention to transform the NHS into a 'modern, 21st-century, consumer-focused service'. They published The NHS Plan, which promised more healthcare professionals, new working methods and a concordat with the private sector. Finally, a philosophical Rubicon had been crossed and market incentives would be henceforth invited back into the game permanently; they just wouldn't be called 'internal market.'

Since then, nudged along by various think tanks, British politicians of all political hues have been on Grand Tours of Europe and the English-speaking world. Valuable lessons have been learned by studying public and private health care markets in Denmark, France, Germany, the Netherlands and Switzerland, but also Australia, Singapore and yes, the oft-maligned U.S.

This has led to a tectonic shift in UK attitudes. Policy-makers are now committed to using market-oriented policies to improve healthcare quality and delivery of services.

With the recognition that consumers should be able to escape bad service, whether that service is publicly or privately provided, there has been a cross-party clamor for greater competition and consumer choice in our public services. There is a new belief that ending public sector monopoly, at least on the supply-side, will help drive technological innovation, make providers more responsive to consumers, and lead to greater adoption of best-practices throughout the system.

Public private partnerships (between the NHS and for-profit commercial ventures) for vital health services are being established across the health system. For example, decontamination services (the collection, cleaning and delivery of sterile surgical instruments), arguably one of the most important elements of modern health care, are to be run by such partnerships.

Over the past four years we have also seen a massive increase in hospital building and modernisation thanks to the government's Private Financing Initiative. Furthermore, NHS LIFT (Local Improvement Finance Trust) aims to develop a new market for investment in primary care and community-based facilities and services. The LIFT investment programme will deliver an unprecedented investment in the primary care infrastructure - new surgeries, clinics and one-stop primary care centres. According to the Department of Health, private sector partners will be identified through a competitive procurement, and then a joint venture established between the local health bodies and a private partner. Over 40 LIFT schemes have been approved and 29 have selected their preferred bidder.

There is now consensus in favour of establishing self-governing hospitals and of taking politicians out of health care. In April 2004, 30 of our best performing ‘three-star’ hospitals became independent Foundation Trusts with significantly greater control over their finances and management (right to borrow, retain surpluses, sell assets, create new working patterns). Eventually, all English hospitals could become Foundation Trusts. In an attempt to increase the supply of high quality acute care across the country, those hospitals that fail to meet standards will have the incentives, and guidance, to steadily improve waiting times, re-admission rates, cleanliness, financial management and so on.

The Government is also using private provision to make up for the shortfall in NHS care. In fact, on 12 April current Health Secretary John Reid awarded two private not-for-profit hospital groups, Nuffield Hospitals and Capio Hospitals UK, contracts to carry out nearly 25,000 hip, knee and other operations in 50 independent hospitals for the NHS in this financial year.

Waves of independent sector profit-making diagnostic and treatment centres (ISTCs) (which will specialise in orthopaedics, cataracts and so forth) are being launched between 2004 and 2006. And more important still, increased patient choice of providers is to be backed by increased supply and financial incentives; by April 2005 money will follow patients for all services under the new payment-by-results system based on a standard price tariff, which will be adjusted by a geographical 'Market Forces Factor'.

Private contracting is also set to be expanded to diagnostics (x-rays will be sent to India), and chronic disease management; even 'Big Pharma' is involved in some pilots. Private providers are determined to play a key part in the provision of integrated primary care services.

A decade ago, Nigel Lawson, then Chancellor of the Exchequer, likened the NHS to an English religion. If that is true, a new Reformation is at hand, driven, ironically, by an attempt to emulate American healthcare organizations like Kaiser Permanente. British politicians, their advisors and civil servants have made pilgrimages to Kaiser in droves. Consequently, US-influence runs deep among policymakers.

New Labour's market reforms display much of the zeal of the newly converted, and the public has welcomed reform with open arms. Numerous surveys show that the public doesn't care who provides quality services, so long as they get them. Indeed, it is the politicians that were slow to pick up on public demands for change.

So these really are exciting times in the UK for those of us who care about empowering patients through market incentives.

We can also see that, across the pond, America's system is in flux. By all means, tinker with your confusing maze of third party payers. But don't put the old NHS system on a pedestal it doesn't deserve.

Learn from our mistakes and focus on creating more competitive markets in health care. Don't emulate the old nationalised one-size-fits-all European model which, it turned out, didn't fit patients well at all.

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