Paying for the NHS: are we asking the right question?

A casual reader of the British press could easily have gained an impression of uncharacteristic political consensus in 2001. The three main political parties seemed to be agreeing that the National Health Service (NHS) required more money. Unfortunately, more detailed study of their positions would soon have revealed that the need for more money was about all on which they could agree. From the debate two key questions emerged. First, how much more money is needed? Second, how should these funds be raised?

Many people thought that the answer to the first question had been provided by the Prime Minister who, in the course of a television interview, committed the UK to increasing expenditure on healthcare to the European Union average¹. This statement had the benefit of simplicity, but unfortunately not of specificity. Health economists rushed to point out the difference between simple averages and population or income weighted averages, and noted the difficulty in forecasting expenditure in a way that would allow the NHS to hit a moving average of which it is one component². A few also recalled that, as healthcare is now a devolved responsibility, this would require coordinating the democratic choices of four different legislatures. The debate between the Department of Health, the Downing Street Policy Unit, and external commentators took on the features of a religious disputation between medieval schoolmen; so it was a relief when, in March 2001, the Treasury stepped in and asked Derek Wanless, a former chief executive of NatWest Bank, to ‘identify the key factors which will determine the financial and other resources required to ensure that the NHS can provide a... high quality service’. The final report is not due until April 2002 but a consultation document issued in November 2001 provides some clear markers of the approach that will be taken³.

Wanless's report justifies the political concerns, showing how, on indicators of both health and inputs into healthcare, the UK lags behind many other industrialized countries. He also provides a clear and concise assessment of the strengths and weaknesses of available models of financing—contrary to what his critics have alleged. Most of the report is, however, taken up by an exploration of how the demand for healthcare, and the ability to meet it, is changing. Many of the issues addressed are familiar—such as ageing populations, advances in technology, and changing patterns of disease and public expectations⁴. What stands out, however, is the critical analysis of a wide range of evidence, free from the ideological slant that often entails doom-laden predictions of the imminent collapse of the welfare state. For example, Wanless dispels much of the mythology about the cost of ageing populations, showing that disability-free life expectancy among the elderly is increasing and that costs of healthcare (although not necessarily social care) are driven more by proximity to death than by chronological age⁵.

The report is especially noteworthy on two other counts. First, it recognizes explicitly that better healthcare requires more than money. Basic economic theory shows that production (whether of health or anything else) involves a combination of labour and capital. Wanless shows how the UK has under-invested in both. We have many fewer health professionals than comparator countries and those that we have are very poorly supported by technology, information technology in particular.

Second, this under-investment in healthcare has continued for decades, with the poor quality of infrastructure apparent on even the most superficial visit to many major hospitals. Perhaps the most important figure in the report is that the cumulative underspend in the UK, compared with the European Union average expenditure (population weighted), is £267 billion, or more than four times the total annual NHS budget in 2000. This figure, coupled with consideration of the length of time it takes to increase inputs, whether technological or human, should cause those politicians demanding instant solutions to pause for thought.

Now the second question, how should these funds be raised? Here too, the debate has often been very confused, with many commentators failing to separate clearly the questions of how the money should be collected and how it should be spent. Many have also failed to distinguish the technical considerations involved (such as how to minimize administration costs) from political judgments (such as the balance between individual and collective funding). This confusion should not be surprising for it is easy to forget how the goals being pursued have changed, and with them the nature of the debate. The long-standing British preoccupation with limiting healthcare expenditure has suddenly given way to an imperative to increase it.

The problem is that healthcare funding inevitably involves transfers from some groups in the population to others. Put simply, those in most need of care are often least able to pay for it. Consequently, if we are to retain universal coverage (which all major political parties support), politicians must find ways to raise money that do not undermine support for the concept of solidarity among those who must pay. This explains the interest by some politicians in either hypothecated (or earmarked) income taxes or social insurance systems. Each has the apparent benefit of transparency, in that the public can be reassured that the additional money collected is being spent on healthcare and not, for example, on defence.

Inevitably, there are some problems. Virtually everyone pays into the general tax pool—via VAT and, with the struggle to reduce the headline income tax rate, a now bewildering array of other taxes. In contrast, a hypothecated tax, as has been proposed by the Liberal Democrats, would fall on a much narrower population base. Moreover, by depending on one source it would be especially vulnerable to changes over the economic cycle, which so far have been much more extreme in the UK than in continental Europe⁶. Thus, revenues would fall at the very times economic recession and unemployment were increasing demands on the healthcare system.

The Conservative Party has expressed an interest in the continental models of social insurance, because historically these have tended to raise larger sums than have tax-based systems. This is often attributed to the clear link between contributions and healthcare. The reality is more complex⁷. Firstly, social insurance systems are rooted in a specific social model in which employers and trade unions come together within a tight framework of government regulation. This is manifest in many ways, such as sector-wide wage negotiations and trade union representatives on company boards. Contributions are paid by both employees and employers so trade unions have had an interest in increasing contribution rates, as additional contributions by their members will be matched by larger sums from employers. It is far from clear whether social insurance could be transplanted to the UK, with its very different model of industrial governance. Experience in the former communist countries of central Europe that have adopted social insurance systems in the absence of such highly regulated industrial systems is far from encouraging. Secondly, insurance funds have few incentives to contain expenditure. In Germany they are largely free to set rates to meet higher expenditures by raising contribution rates further, rather than reducing expenditure by applying pressure to providers. In France, where the government sets contribution rates, funds ran up large annual deficits which were covered through subsidies from taxation, again providing no incentive for funds to balance their books or to contain expenditure through active purchasing.

There is also a certain irony in the current British interest in social insurance systems since those countries that have them are increasingly recognizing their disadvantages. The most important, in an increasingly integrated European economy, is their impact on the cost of employment. However, another consideration is the cost of administration, since social insurance requires a separate system of revenue collection. As a consequence, France is steadily shifting towards funding from taxation, and some other countries have begun to consider such a move⁸.

This leaves general taxation. Compared with the alternatives it has many advantages. It is cheap to collect, it is equitable, and its broad revenue base removes some of the economic distortions created by the alternatives. It does not exclude the possibility of additional charges for, for example, improved hotel facilities. Yet general taxation has clearly failed to produce the sustained investment needed to give the UK a modern healthcare system. Is this solely the fault of the funding system? Other countries with taxed-based systems, such as those in Scandinavia, seem able to fund high-quality services. And when we look at sectors that are more consistently funded from taxation, such as transport infrastructure, education and training, and civil research and development, the UK likewise lags behind many of its continental neighbours⁹. Most obviously, the French and British railway systems are both funded predominantly from taxation but with strikingly different outcomes.

This raises the intriguing question of whether the method of paying for healthcare in the UK is the real issue or whether we should be looking at our attitude to investment? Maybe we should try to answer this question before launching yet another major reform.