Economics: Patient NHS could recover

A GROUP of consultants threatened on Tuesday to stop being employees of the National Health Service and to set up privately. Discontent with the Government's health reforms is rife. 'There is no evidence of benefit,' Dr Alexander Macara of the British Medical Association was reported as saying. So has it all been in vain?

Anyone writing about the NHS must aim off for the normal medical hyperbole. The consultants have been up in arms periodically ever since 1948, when Aneurin Bevan founded the NHS. As that past health minister Enoch Powell remarked, there has never been a period of NHS history without someone claiming that the service was on the brink of collapse.

That charge, though, carries particular credibility today precisely because the reforms introduced on 1 April 1991 were so far- reaching. They were also largely inspired by economists, a profession subject to unusual levels of public mistrust. Markets or near- markets were to be applied in an area where, if the traditionalists were to be believed, the only motivation had hitherto been altruism.

The accusation is also politically interesting, because the minister who can claim parentage is Kenneth Clarke, Chancellor and candidate for the premiership. Does Mr Clarke's handiwork stand up to scrutiny? Or is it another mess that he managed to leave behind in the nick of time?

Answers are difficult simply because so much else is going on: the Government sharply raised health spending in the run-up to the 1992 general election, reversing the austerity imposed by Lady Thatcher. In the circumstances, waiting lists were bound to fall whatever the system.

So far, the Major administration has raised spending by an average 4.4 per cent, far more than the 2 per cent a year needed to meet the needs of medical technology and an ageing population.

However, some tentative conclusions emerge from the first thorough post-mortem of the reforms, published this month by the King's Fund Institute, (Evaluating the NHS reforms, ed Ray Robinson and Julian Le Grand; pounds 9.95 from BEBC Tel. 0202 715 555). Although the overall conclusion is that there is little evidence of change after just three years in the key areas of quality, efficiency, choice, responsiveness and equity, some of the results suggest that 'there is potential for real gains arising from the reforms'.

The economics of health care are interesting. In most markets, consumers know roughly what they want. People can decide for themselves how many Corn Flakes they want, and which brand suits them best. But health is different. Nobody chooses to get involved in car crashes, suffer coronaries or break their legs. In medicine, the consumer's role is limited to complaining about aches and pains. From then on, the doctor takes charge.

In short, the demand for health care is controlled by the doctors who supply it. Imagine how many newspapers would be delivered to your door if editors were put in charge of deciding how many you needed. In health, the professionals understandably think up ever more glamorous forms of treatment, and ever more ingenious arguments for higher pay.

In 'free market' systems, the result is an explosion in health costs. The United States spends more than twice as much of its national income on health care as Britain. High costs are passed on to insurers, who pass them on in higher premiums, thus diffusing the impact. Nobody says no. Doctors earn more than five times the national average, instead of a little more than double here. Yet the US suffers higher infant mortality and achieves no gain in life expectancy because of the large numbers of uninsured.

However, there were also problems with the old NHS system. Although it guaranteed that there would be an overall check on costs - unlike an insurance-based system - its internal economic system was more suited to Eastern Europe before the Berlin Wall came down.

A district well known to be efficient at a particular operation had no incentive to take patients from another district: if it did so, it would merely lengthen its own waiting lists. The average cost of treating acute in-patients varied by 50 per cent between districts, and drug costs were nearly twice as high in some places as in others.

Fortunately, the new Right's fondness for an insurance-based system was thwarted. Kenneth Clarke's compromise was to introduce an internal or quasi-market in which health care remains free at the point of use, but in which there are incentives for efficiency and lower costs within the system.

The first researcher to propose these ideas - Alain C Enthoven in 1985 - suggested that district general managers should be able to trade with each other, but the Government's reforms went further: it co-opted GPs as surrogate consumers. By giving GPs their own budgets, they could shop around between hospitals and exert pressure for efficiency.

Where GP practices were too small or were reluctant to change, district health authorities would act as the 'consumer'. This reform enfranchised GPs at the expense of the rest of the profession, which found itself having to court GP opinion, rather as other producers court consumers.

No wonder the consultants dislike the reforms. Not only are they increasingly subject to management within the trust hospitals, but fund-holding GPs, now responsible for nearly a third of the medical spending on some two-fifths of the population, have used their quasi-market power.

As the study says: 'If a consultant has a private clinic, there is an incentive to keep a long waiting list in the knowledge that this may encourage patients to go to the private clinic instead . . . A major motivation (of fundholding) was, as one GP put it, to 'dish these crooks'.'

What about the downside? There is certainly an increase in administrative costs because of the need for information, management and bargaining: the study puts these at about 4 per cent of the fundholder allocation, but implies that the gains might easily offset them.

However, some of the other predicted problems with fundholding have not materialised. Although there is some evidence of a two-tier service, because patients with fund-holding GPs are getting better treatment, that does not imply that others are faring worse. Nor is this necessarily more than a problem of transition, which would be solved as GP budgets spread. The study finds no evidence that GPs are refusing expensive patients to save money.

On the supply side of the quasi-market, the evidence for improvement is less compelling. More than 90 per cent of hospitals are now trusts with substantial autonomy, expected like the old nationalised industries to 'break even, taking one year with another'. The first wave of 57 trusts are clearly more efficient than other hospitals - with average costs some 11 per cent below the others - but they were also more efficient before the reforms.

However, the conditions for the quasi-market to work are in place. One interesting paper in the study examines which West Midlands hospitals face significant competition from other hospitals in their area, as revealed by their market shares: the results are shown in the graph. If a hospital is high up the curve, it faces little competition. A quarter have so little competition that they would be worthy of inquiry in the US as potential monopolies, but nearly three quarters are competitive and will therefore be under real pressure for efficiency.

Where next? Despite the evidence for their relative success, GP fundholding is in political trouble. The consultants hate it, because it symbolises the shift of power. The non-fundholding GPs dislike it. Even some of the fund- holding GPs dislike the administrative burden. Given that the protests are likely to mount as the Government reins back spending, ministers may make some concession on fundholding to hold off its critics.

That would be a shame. On the evidence so far, these reforms are likely to lead to real improvements in efficiency, which may in turn buttress the public consensus for a well-funded NHS available free to all, regardless of their means.

(Graphs omitted)