Andrew Haldenby

What you need know ahead of the Spending Review – Health

What you need know ahead of the Spending Review – Health
Text settings

With this autumn’s Spending Review set to be one of the most important moments in the life of the coalition government, Coffee House has linked up with the think-tank Reform to investigate what could – and should – be in the final document. This first post, by Reform’s director Andrew Haldenby, is the first in a series of “What you need to know” summaries, looking at each of the main policy areas – in this case, health. Other posts will cover specific policies, examples from abroad and Reform events. We’re delighted to get the ball rolling…

What is the budget?

The NHS is the biggest public service budget in England by far.  In 2010-11 it will spend £105 billion, or about one pound in six of everything that government spends.


The NHS saw the biggest budget increase of any area of Government in the big spending years.  Its budget increased by 106 per cent in real terms between 1999-00 and 2010-11.


Where does the money go?

Mostly on people.  On the latest figures (2007), 53 per cent of the costs of healthcare are labour costs.  That is over £50 billion per year in the NHS.


The total NHS workforce increased by 28 per cent between 1998 and 2008, to a total of 1.37 million people.  Doctors saw the biggest increase (up nearly a half to 134,000).


The rest of the money is mostly absorbed in facilities.  The NHS has a much higher spend on infrastructure than services such as policing and education.  Hospitals are the most expensive part of the infrastructure.


All this means that a pledge to “protect frontline services” is a de facto veto on reform and savings.  Above all, a more efficient health service needs to release money from existing staff and hospital buildings to use in different ways.


Is the money well used? 

The evidence of poor use of resources is greater for the NHS than for any other public service.  Various reports have shown that the NHS commissioners who are given responsibility for the budget have insufficient competence to handle it.  The consultancy McKinsey & Co produced an important report in 2009, showing that £billions could be saved by stopping treatments of little or no use and shifting care out of hospitals, which are the most expensive part of the NHS.


In 2007, writing for the Kings Fund, Sir Derek Wanless went so far as to say that the NHS would lose public support if it did not improve its productivity.  Productivity fell again in 2008, at an increased rate.


What about outcomes?

The UK ranks below countries such as Japan, Switzerland, France, Germany, Australia and the Netherlands in regard to life expectancy, cancer mortality and infant mortality.


The previous government pointed to dramatic falls in waiting times for hospital treatments as evidence of success, and these will have brought real benefits to patients.  But, as noted above, hospital activity is the most expensive part of the service.  The question is whether the tremendous increase in hospital activity and cost prevented the service modernising and using the money in new ways.


Is the NHS already making savings?


Leaders of the NHS have been talking since this time last year about making efficiencies of up to 20 per cent of the budget (that is, money to be spent in different places in the service, not “cuts”).  But major structural reforms, such a big increase in competition, have not taken place.  The proportion of the NHS budget spent on for-profit and not-for-profit providers has been rising, for example, but still only amounts to 5 percent of the overall budget.


In one major respect the new Government has retarded progress by imposing a de facto moratorium on hospital closures and service redesign.  The Government’s veto of long-planned changes to the hospital infrastructure of London set back reform and led to the resignation of Sir Richard Sykes and other leaders of the London Strategic Health Authority.  The Department of Health has now published guidelines on hospital closures which will significantly delay any changes.

Reforming NHS leaders such as Mike Farrar, the CEO of the North West Strategic Health Authority, have praised an initiative called Quality, Innovation, Productivity and Prevention, or QIPP.  This encourages the service to focus on eliminating errors, innovation, value for money and prevention.  But it has yet to be formally evaluated.


What about the Government’s White Paper?

The White Paper – Equity and excellence: liberating the NHS – claims that its proposed measures will “boost” existing plans to make savings.  But its proposals do not amount to structural reform.


The White Paper leaves the Secretary of State for Health accountable for the performance of the NHS, as in previous years.  He or she sets the objectives of a National Commissioning Board.  That Board oversees the commissioning decisions of the groups of GPs that will replace Primary Care Trusts as the supervisors of the budget. 


As a result, the NHS will remain centralised rather than decentralised.  It will remain a system in which Ministers instruct bureaucrats to make the system deliver patient choice, instead of a system based on choice itself.


The White Paper does intend to give more power to GPs.  In this, it is directly in line with the drift of health policy since 2006, when the previous government decided to downplay competition in the interests of minimising criticism from doctors.


The lack of real change in the proposals perhaps explains why the BMA welcomed them. 


So what is real reform?

In its June consultation on the Spending Review, the Treasury said that it will ask basic questions of each department, including: what is the role of government? Can services be run more efficiently? And can services be carried out by non-state providers?


Healthcare is one of the public services where choice and competition can apply.  The OECD estimates that a third of hospitals in France and a half in Germany are run outside of government.  But the Government’s decision to give more power to GPs will militate against competition.  As the BMA has already made clear, most GPs do not see their business as increasing the involvement of the private sector.


The OECD has also pointed out that the UK is unusual in the extent that it depends on the taxpayer to fund healthcare.  Other countries see government’s role as guaranteeing a certain level of healthcare, with individuals having freedom to buy extra insurance as they wish.  To take just one example, the UK would spend £15 billion more on healthcare overall if its private spending was at the level of Italy (2.4 per cent of GDP rather than 1.5 per cent).  The White Paper is silent on the issue of private contribution.


Other countries also make more use of the insurance principle in healthcare – that is, that people should benefit financially from decisions taken to improve their health.  In this country, insurers such as PruHealth use supermarket loyalty cards to reduce the insurance premiums of customers that buy healthy foods.  But the Government is unlikely to follow this route, given that one of David Cameron’s first pronouncements as leader of the Conservative Party was to rule out any shift to a insurance system.


As it happens, David Laws, the star of the coalition government’s first days, was the last senior politician to set out a definition of real health reform.  In the Orange Book of 2004, he described a social insurance system similar to those in Germany or Switzerland, in which citizens choose health insurance from a range of companies, with government subsidies handed out according to income level.  There is strong competition between providers and incentives for people to be healthy.  We will never know whether David Laws would have brought these ideas to the health section of the Spending Review.  But they remain the right ideas, and much more reforming that the path chosen by the Government, which is really a restatement of the status quo.


Further reading

House of Commons Health Committee (2010), Public Expenditure on Health and Personal Social Services 2009, Memorandum received from the Department of Health containing Replies to a Written Questionnaire from the Committee, 14 January 2010.


Bassett, D. et al (2009), The front line, Reform.


Bassett, D. et al (2010), Budget 2010: Taking the tough choices, Reform.


Laws, D. (2004), “UK health services: a liberal agenda for reform and renewal”, in Laws, D. and Marshall, P. (eds) (2004), The Orange Book.


Penaloza, M.C. and Wild, R. (2010), Public Service Output, Input and Productivity: Healthcare, Office for National Statistics. 


Wanless, D. et al (2007), Our Future Health Secured?  A review of NHS funding and performance, Kings Fund.