Philip Booth: The Government's NHS reforms are merely reorganising a failed model, when radical surgery is really required

Professor Philip Booth is Editorial and Programme Director at the Institute of Economic Affairs.

The Government is pressing ahead with another reorganisation of the National Health Service. It is unlikely this reordering of our essentially bureaucrat-driven model will set the world alight. Certainly there is not much chance of the NHS becoming the envy of the world.

We have seen real spending on health in the UK more than double in ten years. We now spend 10% of national income on healthcare. The old excuses about a lack of resources no longer hold water. There are no incentives for efficiency built into the system. It is not clear that this will change.

James Bartholomew in The Welfare State We’re In reported a study that suggested that the typical NHS hospital had more than four times as many support staff per nurse than a typical private hospital. This figure is difficult to verify but few employees or patients would be at all surprised to read this.

The poor outcomes of the NHS by international standards are well known, but even the detractors of socialism, using Hayek’s arguments, would grant socialism one advantage: if there is a single objective the Government wishes to achieve socialism might work. If we want to give every citizen just the “national loaf” to eat, if we want to win a war – at any cost – then it might be achievable through socialism.

Some would argue that we have this position in healthcare. The overriding aim, some would suggest, is equality of health provision for all. The original document that established Britain’s state health system said: “There should be no lower limit of income… for access to the benefits of the entire services.”

However, health inequalities are still very marked in the UK. The gap between life expectancy for men in the highest social class and that in the lowest social class has widened. Infant mortality was 17% higher in the lowest social class than in the highest social class in 2006 – an increase from 13% in 2000. This is all despite per capita budgets 42% higher in areas containing the poorest 10% of people than in areas containing the richest 10% of people.

The model that is supposed to eliminate health inequalities does not do so. The articulate and the better off are better at exploiting a system where priorities are determined by bureaucratic discretion. The government should admit defeat. Monopoly state provision has failed.

The demographic situation is another reason for policy change. The percentage of people aged 65 and over increased from 13% in 1971 to 16% in 2003 and is projected to rise to 23% in 2031. As society ages we will spend more on health. In the UK, spending per head on those over 65 is three times spending on those aged between 15 and 64.

This is not an intractable problem unless we continue to make the wrong policy choices. Proximity to death is the most important factor affecting healthcare costs. If the population ages due to rising longevity, death will occur later, on average, and healthcare costs will therefore be incurred later. That does not automatically make healthcare costs per person higher. The data suggest that the proportion of life spent unhealthy is only growing slowly. Due to technology, we are also better able to adapt to ill health.

The way we fund healthcare, however, creates a problem. We rely on the taxes of the (relatively shrinking) younger generation to finance the care of the (relatively growing) older generation. If we save to finance healthcare costs, the total cost does not fall but a pool of capital is accumulated to meet those costs. As such, just as we talk about unfunded pensions, we can talk about unfunded health liabilities.

If people saved or took out long-term insurance for old age – as they would if the state had not taken over health provision and finance – there would not be a demographic problem. We would also have a more dynamic market responsive to individual need.  There would be stronger incentives for health promotion because the individual would bear the cost of their decisions to live an unhealthy life.

The first stage of reform should be to finance health through the national insurance system. People should then be allowed to opt out if they make private provision through long-term insurance and/or designated health savings accounts. In the long term, the government’s only role should be the subsidisation of healthcare for those on low incomes or for those who have long-term uninsurable risks developed before a given age (for example, age 40).

We are reorganising a failed model – a model that also leads to large inter-generational transfers in an era of demographic decline. Instead we should copy the radicalism of the 1940s Labour government (though not their policies) and go back to the drawing board.