Econocrisis: Don't be too quick to predict revolution

Tip Top 1970s band (MeFi)

99 bottles of beer implemented in various computer languages.

What I'm Reading
NHS Plc: The Privatisation of Our Health Care by Allyson M. Pollock. This is going to be a complicated one: I can see USian brows furrowing already, so let me try to explain.

An American digression
Ignore this bit if you're British.

While we still have a National Health Service, both the Conservative government from 1979 to 1997, and the Labour government from 1997 to the present, have tried to introduce market-like reforms into the NHS. You can divide these into three rough categories.

1. Some areas of health care, like dentistry and optometry, have been truly privatised. Children, the elderly and some of the unemployed get state help, but for most working-age people these are private. They're generally paid for directly rather than though private insurance.
2. Internal pseudo-markets have been set up, with different units within the NHS charging each other for their services. Under the Conservatives, some "fundholding GPs", (i.e. family doctors, Primary Care Physicians) were given a block of money which they allocated on behalf of their patients. Under the Labour party, regional units like "Primary Care Trust" or "Foundation Hospitals" were allocated sums of money to spend within the NHS.
3. Outsourcing has been encouraged: initially for services like cleaning and meals. Recently, some medical operations have also been bought in from private operators.

Now, even with these reforms, most of the money is coming from the central government. Therefore, an American looking at the current NHS sees a Socialist Abomination. However, since the actual delivery of services looks increasingly market-like, Pollock looks at the current NHS and sees a Capitalist Abomination, driven by hardcore market fundamentalism.

I know it's confusing, but you'll just have to deal with it. It's supposedly the test of a first rate mind to be able to hold two contradictory ideas at once.

The book
Pollock is a Professor of Health Policy, and goes through the history of NHS reforms from 1979 in some detail. There's a helpful list of acronyms at the start, covering a bewildering variety of schemes and institutions. She manages to keep it fairly intelligible, though she seems to have succumbed to at least a secondary infection from the jargon: it doesn't occur to her that new hospitals could "open" rather than "come on stream" for instance.

The book has long middle sections on Hospitals, Primary Care and Long-term Care For Older People. There are a couple of introductory chapters giving an overview of the reforms, and a summary at the end. The book is primarily an attack on the reforms, and does a pretty good job of exposing the problems. Some examples.

...at the height of a financial crisis in the Merton, Sutton and Wandsworth health authority it was discovered in its eagerness to dispose of estate and beds at Springfield Hospital, a large psychiatric hospital, it had placed five-year contracts with Cumberland Nursing Home in Mitcham owned by a large for-profit chain... However bed occupancy at Cumberland Nursing Home was at one point less than 40%... this represented a lot of some £400,000 a year being paid for unfilled beds, money that was going straight to the private sector with no return whatsoever. But government guidelines required the health authority not to relax the eligibility criteria and admit more patients for fear of the longer-term revenue implications after the contract had expired. ^p31

The internal market never achieved the efficiencies it was supposed to achieve, above all because it was politically impossible to allow hospitals actually to compete with each other and let the less competitive ones go out of business, as would happen in a real market. Whole districts could not be left without hospitals. ^p42

Requiring all NHS hospitals to pay the Treasury 6 per cent annual interest on the value of their capital assets from 1992 onwards - a 'capital charge' - was presented as a way of making the NHS use its capital assets wisely. In practice... it meant that hospital trusts that had inherited expensive assets that they could not easily sell off were suddenly loaded with costs that they could not pass on... ^p55

New hospitals have been built, more expensively than if they had been financed in the traditional way, and for this reason they have usually been kept small, so as to minimise those costs, regardless of local health needs. ^p57

...in 2003, 'reference costs' were transformed into set prices. Now all services were to be bought and sold at the prices contained in a fixed 'national tariff'. For 15 procedures there was now a fixed price that all hospitals must charge, and for other procedures there was a fixed price for all those performed above the contracted number...

The implication is that hospitals whose costs for any procedure exceed the national tariff will have to give up doing these procedures, or 'subsidise' them from some other part of their budgets. ^p75

Waiting lists became a political issue, so in some hospitals patients waiting for surgery were asked to let the hospital know in writing when they would be on holiday. The administrators would then remove them from the lists for this period, or even deliberately plan their admission for that period, so that when patients phoned to say they could not come in they would be dropped from the waiting list. Other hospitals created new waiting lists -- waiting-to-get-on-the-waiting-list lists. Money was diverted into meeting centrally imposed targets and away from dealing with the problems trusts actually faced. ^p117

Each treatment is priced according to the risk group a patient belongs to: the healthy sixty-year-old candidate for a hip replacement will fall in one category, and the seventy-year-old with diabetes and heart disease in another... But the government, while implementing the system across the NHS, was careful to exempt private sector providers of NHS services. Evidence to the Health Select Committee showed that private sector providers were being given 40% above the average NHS cost for treating patients, having also been allowed to select only standard types of low-cost, high-turnaround procedures. ^p120

Instead of being paid for each immunisation or cervical smear, GPs now received a payment for reaching predefined target levels, so that the risk of not achieving, for example, the immunisation of 90 per cent of the population... rested with them... if they failed to reach their targets, the practice -- and so in turn the GPs -- lost financially. In deprived urban areas where the primary care infrastructure was poor and the population not as compliant, middle-class and health-aware as in more affluent areas, many GPs struggled to achieve even the lower target... ^p141

...Department of Social Security officers started to pay an income-related benefit (now known as Income Support) to residents in voluntary sector care homes to enable them to pay the fees.

....many local authorities started to cut back on their own provision of care home places in the knowledge that the DSS and private sector would fill the gap... The same thing happened in the NHS... the new availability of funds from the social security budget for 'independent' care homes allowed the NHS to discharge dependent patients from long-term care hospital wards into private residential care...

Because it was essentially 'free' for local authorities to place an older person in a private care home, they tended to place them in care homes rather than provide domiciliary care or other support services which would have allowed them to maintain independent lives... By 1991 27 per cent more people had been moved into care homes than would have been the case if the 1981 balance... had been maintained... ^p165-6

The government even gave local authorities a further financial incentive to place older people in need in independent sector care homes by allowing the local authorities to recoup part of their residents' Income Support benefit...

...hundreds of care homes and the land attached to them were transferred to for-profit companies or voluntary associations at rock-bottom prices. In Scotland, for example, Dumfries and Galloway Council obtained consent from the government to sell five residential care homes with a total market value of £2.03 million to a private company for £1 each. ^p169

However, the book is largely a critique. Pollock offers relatively few positive suggestions. Apart from turning the clock back to 1979, the main suggestion is that the private sector should be abolished completely, even the independent doctors who have existed since the beginning.

In support of this, she approvingly cites the Canadian system, where:

...for-profit hospitals, and a two-tier, public and private system are in effect illegal.

Moreover, the book doesn't really attempt to look the bigger picture of health care, either in space or in time. If you do look outside this sceptered isle, it does seem that most of the developed world, whatever its healthcare system, is struggling to some extent to cope with changing demands for healthcare.

For one thing, the developed world has aging populations: older people need more healthcare. For another, more sophisticated and specialized treatments have arrived that are expensive than previously.

It's not clear to me that the NHS of the 1970s could cope with these demands. Generally, the larger an organization is, the harder it copes with change. GPs used to have an unlimited budget: could that system cope with the demand for expensive new drugs?

(I sometimes wonder if it's just a coincidence that the late 1940s to 1970s heyday of the NHS coincides with the heyday of the Soviet Union. The NHS could deal out vaccinations and manage TB wards with same efficiency as the Soviet Union churned out tractors and tanks. But when microchips came along, things got all complicated and changeable and the technocrats started struggling.)

Pollock doesn't really mention the increasing cost of healthcare. She does bring it up in one passage near the end.

How many times have we all listened to conversations in which one side goes like this: "The NHS is a multibillion pound business. With over a million employees it's the second largest employer after the Red Army. No one can run a business that size. No wonder it's bureaucratic and inefficient. The people I meet don't care if it's BUPA or Boots providing the service so long as the government is paying for it. What matters is quality. In any case, with an ageing population and the ever rising costs of news technology, we can no longer afford the NHS. The demand for health care is infinite, so rationing is inevitable. Why shouldn't those who can afford to, pay for some extras and free up some resources for those who can't? Why should those who want to not go privately or pay for their own care? Public expectations are so much higher. What people want today is choice."

Masquerading as rational arguments, these arguments permeate public discourse. Like prions, vicious sequences of malevolent proteins, they replicate in the media and insert themselves in the brains of policy-makers and eventually lethally infect government White Papers and legislation. ^p216

On another topic, it seems to me that in one way Pollock is much too credulous of the government says: she accepts that these NHS reforms are truly "free market". It seems to me that they're not truly free market, but pseudo-market reforms.

Free markets do not deliver efficiency gains by magic. They deliver efficiency gains through specific mechanisms.

1. Competition between firms
2. Creative destruction as inefficient firms go bust, and entrepreneurs create new and better ones
3. Price signaling as tiny shortages and surpluses manifest themselves as price changes in items.

Pollock herself points out that inefficient hospitals are not allowed to go bust: creative destruction doesn't operate.

Prices are set in the national tariff decided by central government: price signaling doesn't exist.

There is a limited amount of competition, but it's massively handicapped by a lack of reality. Hospitals are built too small because the Trust has a limited slice of central government money. In a planned economy, the hospital would be built at a suitable size for the town. In a true market economy, an entrepreneur would build it with as many beds as he could profitably fill. The pseudo-market of the NHS is less effective than either.

Pollock seems to regard the pseudo-markets as real markets, and their failure as illustrating the inferiority of capitalism to planned economies. It seems to me that they've failed to be efficient because they're neither the results of planning, nor of truly free markets. A market isn't really free when the government decides how much everything's going to cost.

Even there, it's not clear to me how bad the consequences of failure has been. She provides her evidence by accumulating evidence of failure. However, healthcare is difficult: every system has some failures. The wastes she reports tend to be of a few million, or sometimes a few hundred thousands. The total budget of the NHS is 90 billion. Factors like the mishandled GP pay deal (£1.76 billion over budget over three years) may be more significant.

Another question is whether the reformed NHS have delivered worse results than other systems. For example, the NHS targets have been much criticized, and the Scottish NHS praised for using them less. But when compared, it seems the targets make a beneficial difference, even when you look at a different measurement.

It also seems to me that Pollock overestimates the degree to which free market ideas have become a "lethal brain infection" in the minds of Labour Party ministers. It seems to me more likely that they're struggling to keep the NHS going as a single publicly funded institution, and they seized on pseudo-market ideas in a genuine attempt to make the NHS dynamic enough to survive. They seem to be trying to use pseudo-markets as a kind of vaccination against genuine markets.

For instance, if you wanted to privatise the NHS, a good way to do it would be to cut back on NHS spending and force all but the desperate to get private health insurance. In fact, since Labour's election, the number of people with private health insurance has fallen from a peak of 1,457,000 in 1996 to a low of 1,088,000. Pollock seems to regard privatization as something that only applies to the provision of services. But by that measure Labour have decreased that level of privatization.

The blurb of the book warns about the threat to the "freedom from fear" Bevan promised for the NHS. But if people are becoming more afraid, how come fewer are opting for private medicine instead?

Going beyond healthcare alone, Labour are criticized for embracing the notorious Private Finance Initiative, in which the government borrows money from the private sector, generally to build stuff, paying it back over a long period. This is a bad thing, since it's more expensive for the private sector to borrow than the government, which is assumed unlikely to go bankrupt.

However, here too I suspect this is a pragmatic move driven by internal politics. Cabinet politics is dominated by a perpetual struggle between the Chancellor of the Exchequer, who doesn't want to give out any money; and everyone else, who wants to spend it. I suspect that PFI is used largely as a way for the "spending departments" to get their hands on money even if the Chancellor and the Treasury don't want to give it.

Overall then, while this book has a lot of useful information, it's too limited in scope to be a good analysis of UK healthcare. Such a book would need to take a comparative look at what works and what fails outside the UK. It would need to look at what the NHS needs today, not just what it needed in the 1970s. And it would need to make positive suggestions, as well as saying "you don't want to do it like that". Does make some pretty cogent criticisms, however.