Vol 28 No 2 Spring 1999

SECTION 1: GOVERNMENT ECONOMIC POLICY

Funding the National Health Service

SUSAN GRANT

Lecturer in Economics at West Oxfordshire College, Witney

1 Introduction

Demand for the services provided by the National Health Service (NHS) continues to outstrip the supply. Newspapers have recently carried stories about London hospitals running out of adult care beds, patients waiting for hours on hospital trolleys before being seen, nurses having to be recruited from abroad to cope with staff shortages and people waiting for years for operations, e.g. hip replacements. The pressures on NHS funding and resulting problems have led economists to question whether the state can continue to fund and provide such a wide range of services and whether the role of the private sector should be increased.

2 Original aim of the NHS

The NHS came into being on 5 July 1948. Its aim was to provide all health care free at the point of use, on the basis of need and regardless of cost. It was funded from general taxation. It was initially thought that once the newly formed NHS had dealt with the backlog of ill health, demand for health care would reduce and then stabilise. However, against expectation, it continued to grow. Concerns about the increasing levels of spending on the NHS led the government to introduce dental charges and charges for spectacles in 1951 followed by prescription charges in 1952. The government also acknowledged that expenditure on the NHS could not be unlimited. Since the 1950s, demand for health care has continued to rise. State expenditure has also risen but the coverage has been reduced. The state now prioritises and rations health care. For example in January 1999 Frank Dobson, the Health Secretary, announced that access to Viagra (the impotence drug), on the NHS would be restricted to certain categories of sufferers.

3 Market failure in health care

The arguments for state funding of the NHS are based on the view that if health care is left to the market it may fail to provide an efficient allocation of resources and will not be equitable.

The forms of market failure in the health care market include:

(a) Externalities. Private sector firms and consumers base their decisions on just private costs and benefits. They do not take into account external costs and benefits. Health care provides external benefits (positive externalities) which, if left to market forces, would be under-consumed as people fail to appreciate the true benefits of health care. Health care provides a range of external benefits such as vaccinations and treatment of infectious diseases, which prevent the spread of illness to other people. A healthy workforce reduces the number of working days lost through illness and increases the productivity of the labour force, so raising the quantity and quality of output.

(b) Lack of information. A consumer may make the wrong decisions. For example, a person may not seek help for a pain in the chest because he or she fails to appreciate the possible seriousness of such a condition. Medical information can also be difficult for people to understand and is often not equally available to the consumer (the patient or potential patient) and the seller (the doctor).

(c) Lack of consumer sovereignty. As doctors possess more knowledge about medicine than patients do, they could sell them more treatments, or more expensive treatments, than patients need.

(d) Imperfect competition. There are significant economies of scale in hospital health care provision. Large hospitals can take advantage of expensive technical equipment and can employ a range of specialists. The advantages arising from such scale economies may result in one large hospital exercising monopoly power in a particular area.

(e) Inefficiencies in health care insurance. Private health care and health care insurance are complementary goods. In a private health care market people take out insurance so that they can meet health care costs when they arise. However, market failure can also arise in the private health care market. One reason is 'moral hazard'. This can come in two forms, i.e. from the side of both consumer and producer. Consumers who are insured may demand more treatments than if they were paying directly for them. For the same reason they may also not feel the same pressure to avoid risky activities and to follow healthy lifestyles. Over-consumption may also arise as producers, the doctors, offer more treatments or more expensive treatments than necessary, as they know that the costs will be covered by the insurance policy.

(f) Short-termism. Consumers may not take a long-term view of their health care needs. Likewise, private sector hospitals will not undertake expensive investment projects unless they are confident of a relatively quick profit.

There is also the issue of equity. If health care were sold as a private good, access would be based on ability to pay rather than need. Since there is a positive correlation between poverty and ill health and insurance premiums for the chronically sick are high, the poor would be doubly disadvantaged.

4 Pressures on NHS spending

There are powerful pressures increasing demand for health care. The three main ones are:

(a) The ageing population. The proportion of the UK population aged 65 plus is increasing. Not only are there more elderly people, but the elderly are living longer. It is the elderly who place the greatest burden on the NHS. The 65­74 age group consume, per head, three times the resources of the 5­64 age group and the 75 plus age group, eight times the resources.

(b) Improvements in medical research and knowledge. New treatments and new drugs are becoming available all the time. These increase the range of illnesses which can be treated and enable people to live longer. Both of these effects increase the cost of health care. For example, multi-organ transplants are now possible. These involve the use of expensive equipment and a large number of skilled medical staff.

(c) Higher expectations of health care. Health care has a high positive income elasticity of demand. As incomes rise, people expect more and higher quality health care. To enjoy a good lifestyle they want good health and are likely to seek medical help more quickly, more regularly, and for more minor ailments.

5 Possible approaches to coping with the rising demand

These include:

(a) Reducing the costs of health care. Some of the new medicines and treatments may actually reduce the costs of health care. For example, a drug that cures Aids would significantly cut costs. Developments in genetics and molecular biology may enable people at risk to be identified earlier and preventative measures to be taken. Microsurgery also cuts down on the costs of operations and after-care. Increased efficiency in the use of resources, by reorganisation and improved training, may also cut unit costs. However, whilst unit costs may fall, improvements in health care are likely to generate even greater demand and may actually raise total expenditure on health care.

(b) Increasing taxation. Surveys show that most people are prepared to pay more in taxation for an improved NHS. However, there are a number of competing demands for tax revenue and it is debatable whether peoples' willingness to pay higher taxes would keep pace with ever greater expenditure on health care.

(c) Introducing new charges for NHS services. Among the possibilities of curbing demand are charging people for visiting their GPs, for outpatient services, and for board and lodging in hospital. Some claim that charging for GP visits would make people consider carefully whether their visits are necessary and might make them value the consultation more. However, it may also discourage some people with potentially serious complaints from seeking medical advice. If these are not diagnosed early, the consequences for the individuals could be serious and may result in the NHS having to provide more expensive treatment later. Charging patients for visiting outpatient surgeries may also discourage visits and may be expensive to collect. All of the measures would also generate only a small amount of revenue ­ an amount approximately equivalent to 5 per cent of the NHS budget.

(d) Reducing the coverage of NHS provision. Nationally the NHS has largely withdrawn from optical services and many dentists work in the private sector. There has also been a significant growth in private sector nursing homes. In certain areas of the country, due to financial constraints, local area health authorities have announced that they will no longer provide certain forms of treatment on the NHS, e.g. infertility treatment and treatment of varicose veins. The more the NHS limits its provision, the greater will be the role of the private sector. Some economists argue that a move towards private sector provision might increase efficiency. They believe that private sector health care is more responsive to patient needs and less subject to bureaucratic interference. They also suggest that placing a price on health care limits the growth in demand, causes consumers to weigh up the value of health care relative to other goods and services and enables consumers to signal their changes in preferences to producers. They argue that charging for health care need not increase inequality of health care consumption, merely change its nature. However, as already noted, most economists would be concerned about the risk of market failure and the lack of provision of health care for the poor.

(e) New forms of joint public/private sector provision. A number of economists believe that the way forward is a mixed system of state and private sector funding. One such existing system, which is receiving a considerable amount of attention, is that operating in Singapore. Individuals pay towards the cost of basic health care provision as an addition to government subsidies which ensure that basic health care is affordable. All those who work are required by law to contribute to the Medisave scheme. As its name suggests, this is a medical savings account rather than an insurance scheme. Employers match the contributions. The money is kept in a personal account. It is exempt from tax and it earns interest. Its main purpose is to pay for the person's medical treatment over and above the state subsidised level. However, it can also be used to pay for the medical expenses of other family members, can be drawn on for use in old age and any amounts left can be passed on in wills, to relatives.

The other two parts of the scheme are Medishield and Medifund. Medishield is a voluntary low-cost catastrophic illness insurance scheme to help members pay for medical expenses arising from serious illness. Medifund covers those too people who are too poor to finance their medical care in any other way. The advantages claimed for this system of co-payment are that it ensures everyone has access to basic health care, allows individuals to exercise choice, limits demand by making people cost conscious, and enables those who are willing and able, to purchase a higher level of service.

6 Conclusion

As people live longer and expect a higher quality of life, and as advances in technology and medical research continue, demand for health care will rise. What has to be decided is what level of funding the public sector can cope with, and hence what range of services can be paid for by the state and what role the private sector should play. Due to the special features of the health-care market and its susceptibility to market failure, a completely private sector option does not seem viable.

QUESTIONS

1 What role might the Private Finance Initiative (PFI) play in funding health care provision?

2 What are the arguments for and against the use of prescription charges?