Is there any viable case for the privatisation of the NHS?

 

Privatisation is the transfer of government owned assets to the private sector so that an institution or company which is a cost to taxpayers becomes a dynamically efficient taxpayer itself, adding to, rather than subtracting from, the national budget. It can take a variety of forms, such as sell-offs, break-ups, popular share ownership, the introduction of private finance initiatives, and internal markets, as well as franchising.

Healthcare is a merit good which in some respects has elements of natural monopoly, or at least economies of scale. So, for instance, if left to itself, the market will provide the same or better drugs and procedures, and forms of prevention, rehabilitation and care, which the NHS provides. It will provide them at a very high average cost, however.

This higher price would be met by co-pay, insurance, or direct spending arrangements on the part of those who now get the service for a relatively small amount of tax, for as long as they need it. In addition, funding the service from taxation ensures the benefits of insurance—that all are covered but most pay in rather than take out—without the administrative and profit-seeking costs.

The individual who purchases such goods and procedures will not know what the benefits and long-term effects of the treatment are in many cases and will suffer from asymmetric information. They will have to trust the medical professional telling them to undertake the treatment and will not know when the professional is wrong or acting unethically. Again, a government body providing the healthcare would be preferable to a private one in terms of lower prices and a lower burden of payment.

Firms in the market will also find it difficult to begin to provide some health goods or services because they have a very high initial average cost and marginal cost. Once they do, they will be able to benefit from economies of scale as average and marginal costs fall, to the point where they function as either an oligopoly or natural monopoly firm.

The NHS also currently functions as a monopsonist and can hold down prices for drugs and services for the whole system by purchasing centrally. If it were broken into competitive or rent-seeking firms, the successor firms would find it difficult to negotiate on an equal basis with global pharmaceutical firms.

These examples illustrate that it would not be appropriate to privatise the entire NHS in the same way as a unit. They also illustrate that there are different parts to the NHS which might attract private investors, or be put out to tender. Hospitals and medical centres, for instance, could be sold on to commercial landlords who might guarantee to maintain existing property or build new buildings in return for rent and a payment for return of the property at some point in the future. Such a programme—the Private Finance Initiative—was in place for most of the 1990s and 2000s. Ultimately, however, it was wound down as a perception arose that it involved paying ‘three times’ for property—to build, to rent, and to buy back—and was bad value for money. At the time it was running, the PFI also allowed the government to present hospital spending as investment rather than expenditure, but many analysts viewed this as a ‘dodge.’

A second form of privatisation which was introduced to the NHS in the 1990s, and which was also applied to the BBC, involved the creation of an ‘internal market.’ This was a structure in which the overall system remained the NHS, but departments, general practitioners, and hospitals became ‘cost centres’ with budgets that they could deploy to other providers, in this country or others.

A twist on the model would be to allow the overall system to buy in cheaper or more efficient services under the NHS name. Price caps and regulation would ensure that service levels were maintained, but efficiency would be found in the way that reduced costs could result in ‘profits.’ 

A variant on such a system would be to encourage consumer choice between hospitals, or to allow GPs to identify the end-destination of patients sent into the system. This does not take account of asymmetric information, practicality, or the need to plan healthcare provision across the country. Given that mistakes or dysfunction in healthcare can ruin lives, the externalities of such a policy approach would be unacceptable to most decision makers and citizens.

One basic problem is that business, quite rightly, is generally predicated upon profit of one sort or another—whether in the form of maximum profit, maximum revenue, or a point just above that where AC=AR. A public health system presented as free at the point of delivery will in any structure involve a price for treatments below market equilibrium, which will result in queues, rationing, shortages, and a reliance on a parallel private system. It is hard to think of companies which would enter such a system, agree to run the system at lower cost than present, and yet convince shareholders to invest money on the basis of very little dividend.

There are examples of successful privatisations of parts of the NHS in the past. Opticians, for instance, used to be part of the national health system. The Government gradually moved away from the idea of universal free provision of optical aids, and dentistry, in the 1980s and 90s. The UK does have thriving dental and eye treatment available privately, but these services are produced at profit. As with pharmacies, they have increasingly moved away from NHS work. Now, Dentists and Opticians in England and Wales prefer to offer differentiated work with a variety of payment programmes from up-front pricing to credit.

The NHS is one of the very few global systems which attempts to provide provision free at the point of delivery as a taxpayer service. A simple transfer into the private sector would not be possible without addressing the issue of how individuals would be expected to pay for the new service. Currently, government contributes almost a fifth of the UK budget to healthcare spending, which runs at around 11% of GDP (lower than many comparable countries.) A large part of this spending is paid for by national insurance, which is a levy on employers and employees in addition to income tax, though funds are not hypothecated.

Governments which wished to move the NHS to the private sector would therefore have to transfer around £213 billion per year into a private fund to pay for it, whilst reducing national insurance or income tax in proportion to how much people were willing to pay into an insurance system until the insurance system could cope. This is impossible.

Should they attempt to transfer the system to the private sector, Governments would also have to bear in mind that the NHS (not counting GPs or surgeons) employs over 1 million people, most of whom could be expected to resist transferring to the private sector, and who, if they did, would cost far more as they would withdraw the goodwill unpaid overtime and work which currently exists in the system.

In addition, a switch over time to insurance would create huge problems of provision for elderly, vulnerable, unemployed, or dependent individuals and could not be expected to be as cheap or to come with the economies of scale that national insurance plus taxation offer for an integrated system.

The German healthcare system, for instance, is often pointed to as a model for the UK, but Germany built up its insurance-based, competitively provided system over decades and alongside a much higher level of taxation than British people have been used to (some 60% of GDP) in the past fifty years.

There is therefore very little case for privatizing the NHS as a whole, and the proper recommendation is that it could not be done without huge and relatively wasteful spending over an extended period of time.

In fact, there is a case for nationalizing more elements of NHS care particularly that involving the first point-of-use General Practitioners. GP appointments are estimated to cost around £39 a time (pre-covid) and were running (pre-covid) at 300 million appointments a year, with telephone and video consultations growing by 15%. The model of named local doctors, working in a profit-taking practice which is owned either by doctors or a medical group, cannot deliver at current prices, as is evidenced by the massive growth of trips to Accident and Emergency, the widespread perception that GPs are not available, and the growth of multi-member GP practices which are regularly overwhelmed.

Governments have proven unwilling or unable to introduce a charge for GP appointments, many of which are now with nurse practitioners, and cannot be reliant on artificially intelligent diagnosis. This leads to a logical position in which they should instead abolish distinctions between GPs and hospital doctors and make GPs employees of one NHS and not practices.

Ultimately, very little solves problems like money does. There are 136,000 hospital beds available in the NHS in addition to critical care and emergency beds, and very few mental health beds. A vast expansion in hospital provision, of the sort which was temporarily envisaged during the beginnings of the covid crisis, plus the recruitment of extra staff, the elimination of GPs, and a move towards private procurement of computer and administration systems for the 219 hospital trusts and 10 ambulance trusts is a viable alternative to privatisation. Both privatisation and such an expansion, however, are probably less viable as a policy than the status quo plus gradual erosion or degradation of the service for political reasons and because of the current level of national debt and budget deficits.

This is a pity. Given the demographic problem of an ageing population, and the likelihood of widespread mental illness after austerity, Brexit, covid-19, the breakdown of law and order in Europe, and the coming stagflation, extra spending now on healthcare, even if funded by borrowing, a slight tax rise, or spending cuts elsewhere, would be of great use in the immediate future.