Providing health care – the state or the free market?

The issue of health provision in the UK is nearly always at the top of the political agenda. Millions of people buy health-care products every week – most of them including over-the-counter pharmaceutical products such as painkillers and first aid equipment are bought and sold freely through the market mechanism. Likewise a sizeable and growing percentage of nursing care is provided by the private sector. But the bulk of major health services, including primary and secondary care are provided through the National Health Service (NHS) and the NHS receive a huge amount of government spending funded through general taxation every year.

Are we getting good value for money from our state provided health service? Is the NHS offering enough proper choice for patients? How best can the NHS or the private sector meet our changing health needs and wants in the coming years? These are hugely important economic as well as political questions.

Equity and Efficiency in Health Care

The issue of health care in the UK and other countries can be linked strongly to the twin concepts of economic efficiency and equity.

(1) Economic Efficiency

Consider first the two main types of efficiency – allocative and productive:

1. Does the health care provided in Britain meet people’s changing needs and wants (i.e. do we achieve allocative efficiency?)
2. Is health care provided at the lowest possible cost per treatment (i.e. do we achieve productive efficiency?) or could improvements be made in the efficiency with which health services are provided for millions of people?

(2) Equity

Are people’s health needs met by health treatments on the basis mainly of clinical need or alternatively based on an ability to pay for health services? Are health outcomes in the UK reasonably equal across localities, regions, ethnic groups, age groups and by gender? Or are there unacceptable inequalities in the provision of health care across different sections of the population? The issue of equitable provision of health is an important ongoing issue.

Market Failure in Health Care

What might cause market failure in the provision of health services?

1. Imperfect information among health care providers and consumers - Consumers may under-value the longer term private benefits of consuming health care – due to information failure (or ‘patient ignorance’). Health providers such as doctors and consultants have more specialised information than consumers – an example here of asymmetric information.
2. Lack of adequate health insurance: A second cause of information failure is that it is virtually impossible for people to predict their future health needs. Sudden illness or injury may require extensive and expensive medical care for which most people are unlikely to have adequate health care insurance. Indeed the private health insurance market will not provide cover for all groups of people. High-risk individuals may find it impossible or extremely expensive to get appropriate medical insurance if the market was the only provider of health care. The ‘failure’ of health insurance companies to provide cover for high risk groups is an example of ‘missing markets’ – another cause of market failure
3. Externalities arising from health care provision: Health services are normally assumed to be merit goods providing a private benefit for people who consume them and additional external benefits for society as a whole.
4. Inequalities in access to basic health care: There are regional and local differences in the quality and quantity of health care available (media stories are fond of discussing so-called “postcode prescribing”). Millions of people are wholly dependent on the NHS for health care– they have no hope of being able to fund private health insurance. If people were required to pay for more treatments they would often be unable to afford them
5. Monopoly power among health care suppliers: if there was a wholly free market in providing health care, it is likely that in the long run, several dominant health care providers would emerge raising concerns about increasing market concentration and the opportunities for these firms to exploit their monopoly power.

The fundamental policy question regarding health care in the UK is this: Should it remain essentially funded by the tax system and provided mainly free at the point of need?

In the United States, which remains the world’s largest spender on health care, state provided and state-financed health care goes mainly to the old and families on low incomes. Most American workers are insured privately through the health insurance schemes run by their employers. But this does not stop many millions of Americans being unable to afford their own health care insurance – this has become a huge political issue in the United States. There are also huge worries among US companies about the soaring cost of employer-funded health benefit schemes.

In rich developed countries, health care spending on average takes up nearly ten per cent of national income (GDP) and the projections for the years ahead see that figure continuing to rise.

The NHS will always face the problem of resource scarcity because our ever-growing demand for different types of health care exceeds the available supply. The Labour government is committed to significant increases in real spending on health + share of health in total GDP.

NHS Spending

Until recently, the UK has been one of the lowest spenders on health care among the major industrialised countries. But the Labour government’s spending programme has catapulted health care spending to new levels. Spending on the NHS is forecast to rise by seven per cent per year in real terms until 2008. At which point, health care spending will have risen to 9.4% of GDP compared with 6.9% in 1998.

Fundamental Principles of the National Health Service

The main aim of the NHS is to provide a comprehensive, high quality service available on the basis of clinical need and not ability to pay. The Fundamental building blocks of the NHS are as follows:

Providing a national universal (comprehensive) service
Health care free at the point of use
Medical care is not based on ability to pay but rather on the basis of clinical need

Who should pay for the drugs dispensed by the National Health Service?

The Economic and Social Importance of Health Care

Quality of Life and Poverty: Health and well-being in childhood affect educational attainment with consequences for people throughout their lives. Ill health in adulthood is associated with poverty and long periods out of work. There is now solid evidence that improvements in medical care pay off in the long term in terms of healthier and longer lives. There are welfare gains from improvements both in life expectancy and also the quality of life that comes from a better overall standard of public health.
Employment: The NHS is the largest employer in UK with over 1.3 million people employed in the NHS in England alone. After social security payments, health is the biggest single component of government expenditure. 15 per cent of tax and National Insurance Contributions (NICs) go to pay for the health service.
Productivity: The health service also affects the productivity of business with almost half of all NHS spending allocated to people of working age. Ill health imposes a restriction on the productive potential of the economy. Around 2 per cent of working days each year are lost due to short-term sickness, while more than 7 per cent of the working age population is unable to work due to long-term sickness or disability costing over £12 billion a year in welfare benefits. Workplace absence is estimated to have cost British business over £10 billion in 1999 and this figure has surely risen in the years since
Higher GDP/Economic Growth and Standard of Living: If average life expectancy could be increased by five years (i.e. to Japanese levels) then UK real GDP could be between £3 billion and £5 billion a year higher.

Fundamental Problems Facing the NHS

Rarely a day goes by without a health story featuring in the newspapers. The NHS faces many challenges – these are four of the main ones:

1. Persistent resource crises: Resource problems are the inevitable consequence of under-funding and under-investment in the health service over many years – affecting the quality and quantity of the capital stock available to health providers
2. Hospital waiting lists: There are persistent delays in people receiving appointments to see consultants and delays in receiving emergency treatment
3. Problems in recruiting sufficient well qualified staff which leads to long hours for NHS staff and contributes to wide disparities in the quality of care and range of care from region to region and between local health authorities.
4. Meeting the growing demand for health care: There are growing doubts as to whether the NHS is meeting changing consumer preferences and growing health needs

Health Care Rationing – An Inevitable Process

Health rationing occurs because demand for health care always outweighs supply. In a free market, markets match supply and demand by altering price. This form of rationing relies on the simply fact that post-tax incomes are unequal and that those households on relatively low incomes will be the first to be priced out of the market. Rationing in the NHS is inevitable - no amount of resources from the Government funded by taxation could possibly meet all of our demands for health care when the NHS system remains based on the fundamental principle of most health services being free at the point of need.

In the diagram below, even if the government invests higher levels of money into the NHS system permitting an outward shift in the PPF for health care services, there is still an issue of scarcity to resolve even though the total “output” of the NHS can rise as a result.

The NHS currently rations health resources in a variety of ways

1. Government rationing: Ministers and Parliament decide on the overall size of the NHS budget thus dictating the type and volume of care the NHS can provide
2. The National Institute for Clinical Excellence (NICE) contributes to rationing decisions by advising the NHS on clinical and economic benefits and costs of certain health care interventions
3. Health authorities and primary care groups allocate money to particular disease/treatment areas. Treatment decisions for individuals are made at the clinical level by health care professionals

Key Factors Putting Increased Financial Pressures on the NHS

1. Developments in medical technology and new treatments: The fruits of research and development in health sciences has brought us many new medical procedures (such as transplants); new treatments and new products (e.g. magnetic-resonance imaging scanners)
2. New drugs including drugs that reduce the “risk” of disease rather than the symptoms of illness – e.g. statins to lower cholesterol or anti-hypertensives to reduce the likelihood of strokes. Pharmaceutical spending is now 13% of total spending on health care in the UK. The costs of bringing a new drug to market are truly enormous. One study has found that, taking into account failed products, it now costs up to $900 million to develop a new prescription drug. The costs of drugs tends to fall in the long term as expensive new drugs protected by patent property rights are replaced by the emergence of generic drugs once this protection is lifted. But this process can take many years.
3. The increased costs of staffing in the NHS -the NHS is a highly labour intensive industry. The costs of pay and other employment costs can take up to sixty per cent of the operating expenses of a hospital.
4. Growing health problems including increased incidence of diseases associated with affluence and the health issues following an increase in relative poverty – for example the costs of treating smoking related diseases and the costs of treating illness associated with rising levels of obesity
5. Long term change in age structure of the population - The cost of health care rises dramatically for older patients and the UK population along with that of many other countries is becoming older as average life expectancy continues to grow
6. Increasing expectations of patients and their families – in part the result of politicians promising to achieve improved health outcomes from extra funding

Demographic Change and the NHS

The UK population is ageing. The medical conditions that account for the majority of the burden of disease in the UK are primarily related to old age – e.g. cancer and coronary heart disease. Spending on health varies significantly with age. The beginning and end of life are the most expensive. On average, around a quarter of all the health care someone consumes in their lifetime is consumed in the last year of their life. Just over a third of all spending on hospital and community health services is for people who are over the age of 65. Over the next 20 years, the UK population is projected to increase by around 5 million.

Main Funding Options for Health Care

The Case for Maintaining a Tax Funded Health Care System

The Government is committed to maintaining a National Health Service funded mainly through general taxation. In the March 2002 Budget, Chancellor Brown announced huge increases in real spending on health financed in part by a rise in National Insurance Contributions from 10% to 11% (effectively an increase in direct taxation).

Justifications for having a state funded National health Service

1. The NHS can exploit huge economies of scale and therefore provide health services for millions of people at an efficient cost – these scale economies include the benefits of specialization and significant buying power in the purchasing of drugs from pharmaceutical companies
2. Revenue to fund the NHS is drawn from a millions of taxpayers who pay mainly through a progressive system of direct taxation- satisfying the principle of vertical equity. Higher income taxpayers are therefore paying more towards the general provision of health care – the NHS is a means towards greater equality of opportunity within society
3. Basing health care treatments on being able to pay might discourage people from seeking important treatments

Case for using the market mechanism / charging for some forms of health care

What are the arguments for extending the market mechanism to providing health care in the UK?

• With user charges, households would freely choose their own pattern of consumption and the supply of health care would then adjust to the pattern of preferences and level of demand for different treatments
• Some economists believe that the price mechanism is a better way of rationing health care than the current arbitrary system of queuing / waiting lists
• The demand for health treatments would be linked to the private benefit to the patient – so a wider system of charging / private sector provision would lead to a lower demand for non-essential treatments and free up resources for more urgent treatments
• Some user charges already exist within the NHS such as those for dental treatment, eye examinations and prescriptions – the principle of user charges could be extended without challenging the fundamental principles upon which the NHS is based
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