Is The UK’s Current Method of Financing and Distribution of the NHS Sustainable?

The UK’s egalitarian post war reforms to guarantee health care for all, prioritising need over ability to pay for treatment was a major reform which has greatly benefited some of the least well off in society. However, being ranked only 24^th in the world in terms of performance on health levels[1] the NHS is no longer the flagship of UK posterity, despite its redistribution and efficiency benefits. Many other countries differing styles organisational structures, and funding and allocation mechanisms have made the UK’s health service comparably less successful. Heavy investment by the Labour party in order to improve equality and efficiency of service has proved unsuccessful raising some questions as to the long term sustainability of some of the NHS’s founding principles. This essay is focusing on whether reforms to the funding structure and aspects of its distribution of funds would help to alleviate some of the problems in the UK’s health service.

Background on Health Care
Polikowski considered that for most governments, health services policy pursues “three objectives: universal access; affordability; and comprehensiveness of covered benefits”[2] and that universal access is a highly valued principle in most industrialized countries. In the UK the founders of the NHS planned for a system that would be able to treat everybody. The 1944 White Paper proposed that the proposed service “must be ‘comprehensive’ in two senses – first, that it is available to all people and, second, that it covers all necessary forms of health care.”[3] It was assumed that “making health care free at the point of use would lead to equal access: equal financial access results in equal effective access.”[4] This was considered to be of benefit to all, as improved access to medicine and higher qualities of treatment would allow the infectious diseases of the day to be overcome. This public good would consequentially benefit all, as the cost of healthcare would eventually fall, as a fewer people became ill and the health service benefited from economies of scale from treating all people in the UK.

Marchand felt that public provision can work well as a sorting device “if low income citizens choose the publicly provided good, while high income citizens go private. The latter contribute to public revenue through income taxation, which is then used to finance the delivery of the private good to the former at a price below the marginal cost.”[5] Consequentially, the rich thus finance the consumption of the poor indirectly.

However, this does not appear to be the case. Firstly, people are living “long enough to contract other diseases that are just as costly to treat, and often more costly because they require expensive medicines or treatments or technology.”[6] Secondly, spending increases in health care creates “higher expectations for quality and access from the public, and from professionals for better pay, conditions, infrastructure, and equipment.” For Butler, “as the population is getting richer it is demanding more and more so that the NHS has to intervene “on health problems that years ago they would have bourne quietly as not being worth the doctors time. And if they are not paying directly, the bill is being picked up by taxpayers, why indeed should they hold back?”[7]This is backed up by Maynard, who observes that this pattern is creating an increasingly ‘medicalised’ society, with no level of expenditure at which all public and professional expectations can be met.[8]

As a result of the Labour Government’s major investment the proportion of private expenditure in total (current) expenditure on health care growing from 10.5% in 1980 to 17.8% in 2000.”[9] This helps to explain why the NHS has become one of the worlds largest employers and a budget now larger than the GDP of 155 members of the UN.[10] However, there are growing concerns that the NHS is becoming too large and too complex to coordinate effectively, resulting in diseconomies of scale. Butler suggests that large centralised state monopolies are “hard to run, and even harder to reform. If their funding comes from the government rather than from users, they are slow to change in response to changing user demands. Since they are not facing competition, they have little incentive to innovate, or raise quality, or keep their costs under control.”[11] This is backed by NHS’s finances are still in trouble, with “many trusts reporting deficits and some plainly unable to bring their budgets under control.”[12]

There are even concerns that the NHS is failing to provide equal access. As Cooper suggests, “there was nothing inherent in the 1946 Act which could have systematically brought equality about.”[13] One of the main reasons was that during the conception of the NHS different parts of the country had significantly different levels of bed and staff, with Powell suggesting that The NHS inherited a very unequal geographical pattern of provision. [14] Similarly, while Klein recognises that there were some efforts to correct the distribution of patient care he still contends that the hospital sector “largely saw an incremental pattern of resource allocation that perpetuated existing inequalities.”[15]Powell even goes as far to suggest that Labour’s 1997 White Paper’s aim to deliver ‘fair access’ will achieve little.[16] Harrison also feels that there are limits to the NHS’s desire for equity, citing the introduction of charges of prescriptions in the 1950s. However, these criticisms may be too loud, as the UK was ranked 8^th in terms of responsiveness of health systems and level of distribution by the WTO.[17]

Direct Taxation
One of the major reasons for these issues occurring is the method of health make funding available, as well as to set the right financial incentives for providers, to ensure that all individuals have access to effective public health and personal health care. This means reducing or eliminating the possibility that an individual will be unable to pay for such care, or will be impoverished as a result of trying to do so.” [18]

Following the last Conservative Government the ratio of investment had reached historically low levels, of 7.3% of total expenditure of GDP. To deal with this the Labour Government has implemented a sustained large injection into the NHS, raising the proportion of private expenditure in total (current) expenditure to 8.3% of GDP.[19] However, the expected renaissance of healthcare has failed to materialise leading to commentators to suggest varying changes in the way health care is provided in the UK.

The majority of these criticisms come from libertarian arguments. They believe that the “achievement of freedom requires that individuals are free to make their own choices, constrained by Government only to the minimum necessary extent to provide security and legal systems that protect private property rights and ensure contracts are enforced.”[20] It is assumed that in such a system “individuals will pursue their own interests and those unable to make their way will be cared for by charity, funded by voluntary economic growth and ensure the freedom valued so highly by libertarians.”[21] Despite the increases in funding in the last couple of years the NHS’ finances are still in trouble, with “many trusts reporting deficits and some plainly unable to bring their budgets under control.”[22] Of course there are a number of factors which could help to explain this crisis, such as demographics. However, it is still the case that the centrally funded system in place permits inefficiencies to continue.

Egalitarians who tend to be supporters of the NHS put “equality of opportunity forward as the primary social goal. In such a society all individuals have the right to basic goods and it is for society to define what these basic goods should be. In this world lack of achievement must not be punished and collective mechanisms are needed to ensure all receive care. For egalitarians equalising opportunity may necessarily involve restricting the freedoms of others through taxation and the law”[23]

It has to be remembered that the UK has a very unique system of health care funding, with some 83.4% of healthcare spending in the UK came through the state (see table below). Of the Organisation of European Cooperation and Development OECD countries, the public sector share was higher only in Luxembourg, some Nordic countries (Sweden, Norway, Iceland) and some former Communist countries (Slovakia, Czech Republic).”[24]

Structure of health system financing and provision in four countries p102[25]

For the Government direct taxation makes it easy to control expenditure compared to indirect or national health insurance. This is because they have some degree of delegated discretion in setting contribution rates. The method of funding is seen as an institution by many, making it difficult to reform, with many considering proposals for ‘patient participation in health care financing’ to be “misguided or cynical attempts to tax the ill and/or drive up the total cost of health care while shifting some of the burden out of government and insurer budgets.”[26]

Hypothecated Taxes

Hypothecated taxes have been mooted in the past, in order to make people understand how much the NHS costs. This visibility is assumed to reinforce the opportunity cost of health care and that it is not free and hopefully discourage people from making excessive demands on the system. For libertarians such as Butler it would then become possible to stimulate competition through allowing people to contract out of it. This occurred for state pensions, where people were able to divert their money into their own private-sector pension plan rather than the state pension.

However, the Treasury has deep-seated objections to hypothecated taxes, as if they conceded the principle “then motorists would expect the whole of the taxes they pay to be spent on the roads, not a quarter of it; which drinkers might object that very little of their excise duty they part with goes to deal with problems of alcoholism or drunkenness, and that the duty should be reduced; while peace campaigners may demand to be excused their contribution to the defence budget.”[27]Butler even suggests that it could even have the opposite effects, increasing demand as people attempt to increase their return for their taxes. It is also unlikely that the ability to contract out of the NHS will be pursued, as the Labour Government closed down the state-pension exemption. The public has little enthusiasm for rebates, as they are perceived as being less than the average health spending and favouring wealthier people. Similarly, “if it is higher, then people argue that health spending on those who choose to remain in the state system will be sorely reduced. Many people who take the rebate would be insuring privately anyway – the so called deadweight cost.”[28]

Local Funding
Just as the Labour Government is decentralising its influence over local health authorities it may be worth considering the possibility of local funding. In Denmark 80% of funding is raised locally by 14 country councils, making it a major issue in local elections.[29] Commentators such as Butler believe that this makes people more focused on healthcare spending, as it is less opaque than the Treasury operated system that currently exists.

There are concerns that such a system would make it more difficult to redistribute funding between regions in terms of equity. Also the council structure is not developed enough sufficiently to take on such a burden, with councils struggling to justify current budgets to their electorate as a result of funding structures in place. Also, Butler fears that such systems would be built upon local monopoly (or monopsony), with comparisons between local areas “much more limited than they would be in a completely free private market.”[30]

National Insurance Schemes
The fairness argument put forward by egalitarians has merit but it does not necessarily require the state to pay for an provide all medical care. As Butler points out, “the state does not run and finance grocery or clothes shops; rather it supports the incomes of those who cannot otherwise afford food and clothing, so that they are empowered as customers in those markets. It does not fund people who can fund themselves.”[31] The UK’s model is an exception, with most other countries operating some form of national (or social) insurance scheme, with varying forms of competition and cover.

Varying National Styles
Being ranked 4^th in terms of performance on health levels France is seen as operating a successful national insurance scheme.[32] There employers and employees both pay towards a basic health care package, around 20% of the total payroll, with employers paying close to two thirds.[33] The system permits citizens a good choice of family doctor and can contact specialists without having to see a gatekeeper. Despite this 85% buy private insurance in order to improve the comfort and privacy of care whilst in hospital. Similarly, Australia operates a universal hypothecated tax but 50% of Australians purchase private insurance from independent providers.[34] This method is actively promoted by the government through generous tax rebates and ensuring that premiums do not vary according to health risk.

More market based schemes exist in countries like Switzerland, which has a compulsory social insurance system that is paid by individuals not employers, and where the insurance funds actually compete between each other based on government approved standards. There are a variety of schemes available in the USA but is predominantly based around private insurance and usually paid for by employers. There are government-financed systems such as Medicaid and Medicare for poorer families and the elderly but there are many disadvantaged people who do not qualify for it. The USA model is very expensive, with 13.3% of total expenditure of GDP compared to the UK’s 8.3%. to deal with this some citizens end up choosing health management organisations, where members contribute owner premiums but access to service is restricted to an actively managed gatekeeper function. However, many eschew this system in America, as many “resent the rationing implicit in the HMO model, contrasting it with the free access afforded by the comprehensive insurance system.”[35]

An interesting mix of these different funding styles exists in the Netherlands, which is part tax funded and part social insurance. Tax funding covers long-term, uninsurable or catastrophic events or illnesses. However, for acute care there is compulsory social insurance, with contributions being income assessed. For Butler, the Netherlands has a good way of mixing tax funding for unaffordable items, although he does recognise that it does “lead to almost constant debate and political pressure to include more and more items in the free, tax-funded part of the system.”[36]

Private Funding

Critics of NHS funding such as Bosanquet consider that real reform must extend to demand as well as supply: “A more dynamic NHS required a national environment where there are independent sources of funding. Without change in funding, any supply side only reform is likely to run into new problems of rationing as improvements increases the demand for services. The belief that it will be possible both to have reform and continue with taxation as the sole source of funding is unrealistic.”[37]

The perceived advantage of private health organisations is that if care is perceived to be free, people would demand more of it, making demands on trivial conditions. For Harrison “if the patient sees or suffers at least some of the cost can such over demand be avoided” and that the question is “how to restore that link while at the same time ensuring that it does not deter people from seeking and getting the medical care that they truly need.” [38]

There appears to be a benefit from taking some services from the straightjacket of direct funding. As Bosanquet suggests, “although core services will be tax funded there will be many supplementary services at differing levels where they will be an element of co-payment. This is already happening in services such as those for infertility and for services such as physiotherapy.”[39] In the future as newer but more expensive treatments emerge it is unlikely that offering non-critical services free of charge will be efficient or even equitable, given the fact that many people who would be able afford such treatment would be able to receive it without any financial contribution or assessment.

An econometric study by Besley et al for the demand for private health insurance in the UK suggested that insurance is a normal good and that among the six regional public health authority quality indicators, only the size of the long-term waiting lists shows up as a significant explanatory variable.[40] These conclusions when combined with second best arguments as a result of interfering in markets lead to Marchand suggesting that the coexistence of a public and private health sector, with waiting times in the former, enacts redistribution and that “negative redistributional side effects are part of the price tag for policy measures aimed at reducing waiting times/lists.”[41]

Any enlarged private health care system in the UK will still be a mix between public and private provision. For Merchand this compromise is never desirable, as the redistributional effects are of second order relative to deadweight losses; that actuarially fair sickness insurance that protects people without private health care insurance against waiting time risk “though desirable from the citizens point of view is detrimental for the in-kind redistribution agreement.”[42]

Pooling

Clearly any regulatory issues regarding the way insurance schemes are implemented. There are concerns over selection behaviour in a more market orientated health care system. Either the health organisations will create a pool of customers with low risk (an example of risk selection) who will contribute but not cause expense, or the high risk consumers will claim more (an example of adverse selection). As a result the WTO warns that any system “becomes a battle for information between consumers (who usually know more about their own risk of requiring health interventions) and the pooling organisation (which needs to know more about consumers’ risks to ensure long term financial sustainability).”[43] This increases costs on the service in order to maintain competitiveness may be significantly larger than the financial benefits from market reforms.

If risk selection predominates and there is weak regulation then the WTO feels that the poor and sick will be excluded. Categories such as the disabled or the elderly would be denied treatment in an unregulated market if they had not saved enough income. At the same time the healthy and young would tend to not need the services for which they had saved. It would be important to create a structure in which “people benefit from mechanisms that not only increase the degree of prepayment for health services, but also spread the financial risk among their members.”[44]

However, it must be remembered that although larger pools offer better economies of scale after a while very large pools (such as the NHS) lose their advantage. This notion of multiple pools existing successfully in an economy without fragmentation is one of the strongest arguments for reducing the scope of the NHS.

Pooling to redistribute risk, and cross-subsidy for greater equity

(arrows indicate flow of funds)[45]

Charging

Currently charging exists for medicine and some medical equipment. It is not a significant source of revenue, with prescription charges only bringing in less than 1% of what the NHS costs.[46] However, the scope for expanding large or lengthy medical interventions is quite controversial but crucial, as it is a key battleground between egalitarian and libertarian policy makers.

Charges have existed since the 1950s on grounds of efficiency, as the need to pay a small amount towards the cost of mechanism helps to deter people from purchasing unnecessary medicine. However, for Harrison it is important to deal with the ‘worried well’, as it may identify illness earlier than would occur if price barriers reduced utilisation.[47]

There is an equitable element built in to the UK charge system, as it is still subsidised. In France, the cost is greater throughout its health service. However, the government repays up to 75% or 80% of the cost for the poorer patients, with the poorest six million receiving services free.[48] This system does tend to be bureaucratic and expensive as a result of level of means testing required making such an implementation in the UK possibly inefficient.

Conclusion
There is nothing particularly wrong with the NHS. It is an efficient run service which has passed Polikowski’s standards of universal access, affordability and comprehensiveness of covered benefits. There may be questions over its efficiency but its ability to distribute has been successful despite flaws. Despite an enthusiasm for market based reforms the Labour Government has been focused on improving the NHS and reversing the slide that occurred during the previous Conservative Government. However, this has not been as successful as hoped as the larger budgets have been absorbed by needed wage increases and patients with higher expectations for health care. The new Conservative leader has broken ranks from the traditional party line in support of the NHS. However, the cracks that are appearing in the NHS system are starting to show. There are battle lines appearing over the need for more regional redistribution and increased use of private health care. Despite this the public is relatively content with the current financing mechanism for healthcare and fearful of suitable alternatives, making the financing and principle distribution of the NHS likely to be the same for the foreseeable future.

Appendix

Fairness of financial contribution to health systems in all Member States,

WHO index, estimates for 1997[49]

Overall health system attainment in all Member States, WHO index,

estimates for 1997[50]

Health System Performance in all Member States, WHO Indexes, Estimates for 1997[51]

Health System Performance in all Member States, WHO Indexes, Estimates for 1997[52]

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[1] The WTO Health Systems: Improving Performance (The World Health Report) 2000

[1] OECD OECD Health Data (OECD, Paris) 2003

[2] p. 133–142. Polikowski, M. & Santos-Eggiman, B. How comprehensive are the basic packages of health services? An international comparison of six health insurance systems (Journal of Health Services Research and Policy), 2002

[3] P7 Powell, P and Exeworthy, M Equal Access to Health Care and the British National Health Service (Policy Studies, Vol 24, No1), 2003

[4] p4 Powell, P and Exeworthy, M Equal Access to Health Care and the British National Health Service (Policy Studies, Vol 24, No1), 2003

[5] p2 Marchand, M and Schroyen, F Can a Mixed Health Care System be Desirable on Equity Grounds? (Scand J of Economics) 2005

[6] p294 Butler, E Alternative Funding Models (The Future of the NHS)

[7] p294 Butler, E Alternative Funding Models (The Future of the NHS, XPL Publishing), 2006

[8] p1 Maynard, A and Sheldon, T Funding for the National Health Service (York Health Policy Group, Department of Health Sciences, University of York) 2002

[9] OECD OECD Health Data (OECD, Paris) 2003

[10] p293 Butler, E Alternative Funding Models (The Future of the NHS, XPL Publishing), 2006

[11] p293 Butler, E Alternative Funding Models (The Future of the NHS, XPL Publishing), 2006

[12] p293 Butler, E Alternative Funding Models (The Future of the NHS, XPL Publishing), 2006

[13] Cited in p4 Powell, P and Exworthy, M Equal Access to Health Care and the British National Health Service (Policy Studies, Vol 24, No1) 2003

[14] p4 Powell, P and Exworthy, M Equal Access to Health Care and the British National Health Service (Policy Studies, Vol 24, No1) 2003

[15] Klein, R. The New Politics of the NHS (4th edition. Harlow: Longman), 2001.

London: IEA.

[16] p4 Powell, P and Exworthy, M Equal Access to Health Care and the British National Health Service (Policy Studies, Vol 24, No1) 2003

[17] The WTO Health Systems: Improving Performance (The World Health Report) 2000

[17] OECD OECD Health Data (OECD, Paris) 2003

[18] p93 The WTO Health Systems: Improving Performance (The World Health Report) 2000

[19] OECD Health Data (OECD, Paris), 2006

[20] p281 Harrison, T Alternative Funding Models (The Future of the NHS, XPL Publishing), 2006

[21] p281 Harrison, T Alternative Funding Models (The Future of the NHS, XPL Publishing), 2006

[22] p293 Butler, E Alternative Funding Models (The Future of the NHS, XPL Publishing), 2006

[23] p281 Harrison, T Alternative Funding Models (The Future of the NHS, XPL Publishing), 2006

[24] p293 Butler, E Alternative Funding Models (The Future of the NHS, XPL Publishing), 2006

[25] p102 The WTO Health Systems: Improving Performance (The World Health Report) 2000

[26] p287 Harrison, T Alternative Funding Models (The Future of the NHS, XPL Publishing), 2006

[27] p295 Butler, E Alternative Funding Models (The Future of the NHS, XPL Publishing), 2006

[28] p294 Butler, E Alternative Funding Models (The Future of the NHS, XPL Publishing), 2006

[29] p297 Butler, E Alternative Funding Models (The Future of the NHS, XPL Publishing), 2006

[30] p297 Butler, E Alternative Funding Models (The Future of the NHS, XPL Publishing), 2006

[31] p294 Butler, E Alternative Funding Models (The Future of the NHS, XPL Publishing), 2006

[32] The WTO Health Systems: Improving Performance (The World Health Report) 2000

[33] p298 Butler, E Alternative Funding Models (The Future of the NHS, XPL Publishing), 2006

[34] p301 Butler, E Alternative Funding Models (The Future of the NHS, XPL Publishing), 2006

[35] p301 Butler, E Alternative Funding Models (The Future of the NHS, XPL Publishing), 2006

[36] p300 Butler, E Alternative Funding Models (The Future of the NHS, XPL Publishing), 2006

[37] p311 Bosanquet, N and Haldenby, A The Case For Pluralism (The Future of the NHS, XPL Publishing), 2006

[38] p296 Butler, E Alternative Funding Models (The Future of the NHS, XPL Publishing), 2006

[39] p311 Bosanquet, N and Haldenby, A The Case For Pluralism (The Future of the NHS, XPL Publishing), 2006

[40] Besley, T., Hall, J. and Preston, I. The Demand for Private Health Insurance: Do

Waiting Lists Matter?, (Journal of Public Economics), 1999

[41] P3 Marchand, M and Schroyen, F Can a Mixed Health Care System be Desirable on Equity Grounds? (Scand J of Economics) 2005

[42] p3 Marchand, M and Schroyen, F Can a Mixed Health Care System be Desirable on Equity Grounds? (Scand J of Economics) 2005

[43] p104 The WTO Health Systems: Improving Performance (The World Health Report) 2000

[43] OECD OECD Health Data (OECD, Paris) 2003

[44] p99 The WTO Health Systems: Improving Performance (The World Health Report) 2000

[45] p100 The WTO Health Systems: Improving Performance (The World Health Report) 2000

[46] p297 Butler, E Alternative Funding Models (The Future of the NHS, XPL Publishing), 2006

[47] p288 Harrison, T Alternative Funding Models (The Future of the NHS, XPL Publishing), 2006

[48] p297 Butler, E Alternative Funding Models (The Future of the NHS, XPL Publishing), 2006

[49] p188 The WTO Health Systems: Improving Performance (The World Health Report) 2000

[50] p196 The WTO Health Systems: Improving Performance (The World Health Report) 2000

[51] p199 The WTO Health Systems: Improving Performance (The World Health Report) 2000

[52] P200 The WTO Health Systems: Improving Performance (The World Health Report) 2000