An alternative history: Britain without the NHS (Part 2)
16 December 2016
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15 December 2016
Economic Theory
19 December 2016
Economic Theory
11 November 2024
Continued from Part 1
Between 1946 and 1948, there was an attempt at a government takeover of healthcare, which caused a rift within the organised labour movement. It was successfully brought down by an anti-nationalisation coalition led by Friendly Societies and independent hospitals, who were fiercely protective of their independence.
But with Bevan’s resignation and the quashing of his Bill, the hard work had only begun. All stakeholders agreed that a return to the pre-war status quo ante was not an option. Bevan’s successor Ken Bowman, an economist who would later become a co-founder of the emerging science of health economics, came up with an entirely different leitmotiv for reform. He believed that the old system’s main problems did not lie on the supply side, but on the demand side. The system generally worked well for the majority of people. It was not a complete coincidence that the UK had one of the highest life expectancies in the world. The system could deliver good quality healthcare – but not everybody. There was wide variation on the basis of geography, income, occupation, and the financial situation of different health insurers.
Bowman addressed this problem in two steps. Firstly, a commission was set up to work out a minimum ‘healthcare basket’, a list of treatments that every insurer had to cover, and for which every household had to purchase insurance coverage. Secondly, he introduced two types of subsidies. The first was simply a means-tested premium subsidy, which would ensure that the basic health insurance package was affordable to everybody. The second one was a subsidy for associations that disproportionately insured ‘bad risks’, paid for by associations that disproportionately insured ‘good risks’. These transfers were channelled via a so-called ‘risk structure compensation fund’ (RSCF). The RSCF created a level-playing field for all insurers, regardless of the health profile of their policyholders, and in this way, it also created a level playing field for sick and healthy people.
Bowman’s other main legacy is the principle of prefunding. Healthcare costs tend to rise systematically with age. Insurers were therefore required to build up old-age reserves on behalf of their members over the course of their working life, and use them up over the course of their retirement.
Bowman’s health reforms were of a highly technical nature: most people barely noticed them at the time, and they are barely remembered today. The late 1940s and early 1950s are generally remembered as a period of a return to normal, as far as healthcare is concerned. And yet, while they may have seemed like minor technical tweaks, Bowman’s reforms were enough to quietly sort out most of what was wrong with the pre-war system. The remaining gaps in coverage were closed, and so was the better part of the part of the ‘health gap’ that can be attributed to healthcare (as opposed to lifestyles etc).
Otherwise, though, there was a remarkable degree of continuity throughout the 1950s and 1960s. Most people chose their health insurer on the basis of occupation or place of residence, and switching rates were low, so families often remained with the same insurer for generations. The old Friendly Societies remained the dominant players in the insurance market.
In the more individualistic 1970s, such traditional group loyalties began to weaken. People began to see themselves as consumers as well as club members, and began to shop around for attractive alternatives. Slowly but surely, the insurance market became more competitive and dynamic.
These changes in insurance markets had important ramifications for provider markets. Up until the 1970s, most insurers only held contracts with a small number of providers. In the 1970s, people began to demand greater levels of provider choice, and insurers had to respond.
Increased demand for provider choice led to an increase in demand for information. Medical outcomes data (especially standardised mortality rates), as well as more accessible, layman-friendly ratings, assessments and rankings, became more widely available. Poorly-rated providers would be hounded by the press, those with good ratings would shout about it from the rooftops. It came as a bit of a shock that differences in outcomes were much larger than expected, but this transparency shock ultimately proved helpful.
Insurers began to base their contracting decisions, among other things, on outcome data. Poorly performing providers would lose contracts and custom, well-performing ones would gain them. These changes in commissioning would shake up the provider landscape. Clinical guidelines were developed. Benchmarking and learning from best practice became much more deeply engrained in the sector. Modern management and quality control techniques, which had thus far bypassed the health sector, were being introduced.
These developments began slowly in the 1970s, and sped up massively in the 1980s. The decline in traditional heavy industries, and the related decline in trade union membership, weakened class-based and occupation-based social identities. Many of the old mutual insurance associations, built on a strong working-class identity, found it hard to adapt to this new environment. Some of them eventually worked out ways to combine their traditional solidaristic ethos with a professional business approach. But others saw their market share dwindle, some were forced to merge with others, and some disappeared altogether. The ‘Big Bang’ of 1986 gave another big boost to competition, by making it much easier to switch health insurers.
As the country became more relaxed about the profit motive, for-profit insurers and for-profit providers experienced an unprecedented surge in their market shares. As the economy became more globalised, so did the health sector. Foreign companies started to take a keen interest in the British market. Today, ‘Medi-Partenaires’, ‘Tokushukai’, ‘Kaiser Permanente’, ‘Asklepios-Kliniken’ and others are household names, but back in the early 1980s, they were exotic newcomers. Established providers resented them, but these newcomers brought new business models, new technologies and new medical know-how with them. Insurers also began to offer a greater variety of healthcare plans.
This period also brought greater variation in the extent, type and depth of vertical integration. This is a feature of our health system which often confuses foreign visitors. A lot of countries have a complete insurer-provider split, meaning that health insurance and healthcare provision are completely separate activities, not unlike car insurance and car repair services. In other countries, this split does not exist at all. Healthcare providers work more like gym chains, where members are entitled to use the facilities in return for a monthly fee. In the UK, both the ‘gym model’ and the ‘car insurance model’ exist – and so does virtually everything in between.
This means that there is not really such a thing as ‘the healthcare system’, but a great variety of different models of organising healthcare. To British people, the question ‘How does healthcare work in your country?’ makes no more sense than the question ‘How does leisure work in your country?’ would.
To be continued…
Dr Kristian Niemietz is the author of the IEA monograph ‘Universal healthcare without the NHS‘.
Between 1946 and 1948, there was an attempt at a government takeover of healthcare, which caused a rift within the organised labour movement. It was successfully brought down by an anti-nationalisation coalition led by Friendly Societies and independent hospitals, who were fiercely protective of their independence.
But with Bevan’s resignation and the quashing of his Bill, the hard work had only begun. All stakeholders agreed that a return to the pre-war status quo ante was not an option. Bevan’s successor Ken Bowman, an economist who would later become a co-founder of the emerging science of health economics, came up with an entirely different leitmotiv for reform. He believed that the old system’s main problems did not lie on the supply side, but on the demand side. The system generally worked well for the majority of people. It was not a complete coincidence that the UK had one of the highest life expectancies in the world. The system could deliver good quality healthcare – but not everybody. There was wide variation on the basis of geography, income, occupation, and the financial situation of different health insurers.
Bowman addressed this problem in two steps. Firstly, a commission was set up to work out a minimum ‘healthcare basket’, a list of treatments that every insurer had to cover, and for which every household had to purchase insurance coverage. Secondly, he introduced two types of subsidies. The first was simply a means-tested premium subsidy, which would ensure that the basic health insurance package was affordable to everybody. The second one was a subsidy for associations that disproportionately insured ‘bad risks’, paid for by associations that disproportionately insured ‘good risks’. These transfers were channelled via a so-called ‘risk structure compensation fund’ (RSCF). The RSCF created a level-playing field for all insurers, regardless of the health profile of their policyholders, and in this way, it also created a level playing field for sick and healthy people.
Bowman’s other main legacy is the principle of prefunding. Healthcare costs tend to rise systematically with age. Insurers were therefore required to build up old-age reserves on behalf of their members over the course of their working life, and use them up over the course of their retirement.
Bowman’s health reforms were of a highly technical nature: most people barely noticed them at the time, and they are barely remembered today. The late 1940s and early 1950s are generally remembered as a period of a return to normal, as far as healthcare is concerned. And yet, while they may have seemed like minor technical tweaks, Bowman’s reforms were enough to quietly sort out most of what was wrong with the pre-war system. The remaining gaps in coverage were closed, and so was the better part of the part of the ‘health gap’ that can be attributed to healthcare (as opposed to lifestyles etc).
Otherwise, though, there was a remarkable degree of continuity throughout the 1950s and 1960s. Most people chose their health insurer on the basis of occupation or place of residence, and switching rates were low, so families often remained with the same insurer for generations. The old Friendly Societies remained the dominant players in the insurance market.
In the more individualistic 1970s, such traditional group loyalties began to weaken. People began to see themselves as consumers as well as club members, and began to shop around for attractive alternatives. Slowly but surely, the insurance market became more competitive and dynamic.
These changes in insurance markets had important ramifications for provider markets. Up until the 1970s, most insurers only held contracts with a small number of providers. In the 1970s, people began to demand greater levels of provider choice, and insurers had to respond.
Increased demand for provider choice led to an increase in demand for information. Medical outcomes data (especially standardised mortality rates), as well as more accessible, layman-friendly ratings, assessments and rankings, became more widely available. Poorly-rated providers would be hounded by the press, those with good ratings would shout about it from the rooftops. It came as a bit of a shock that differences in outcomes were much larger than expected, but this transparency shock ultimately proved helpful.
Insurers began to base their contracting decisions, among other things, on outcome data. Poorly performing providers would lose contracts and custom, well-performing ones would gain them. These changes in commissioning would shake up the provider landscape. Clinical guidelines were developed. Benchmarking and learning from best practice became much more deeply engrained in the sector. Modern management and quality control techniques, which had thus far bypassed the health sector, were being introduced.
These developments began slowly in the 1970s, and sped up massively in the 1980s. The decline in traditional heavy industries, and the related decline in trade union membership, weakened class-based and occupation-based social identities. Many of the old mutual insurance associations, built on a strong working-class identity, found it hard to adapt to this new environment. Some of them eventually worked out ways to combine their traditional solidaristic ethos with a professional business approach. But others saw their market share dwindle, some were forced to merge with others, and some disappeared altogether. The ‘Big Bang’ of 1986 gave another big boost to competition, by making it much easier to switch health insurers.
As the country became more relaxed about the profit motive, for-profit insurers and for-profit providers experienced an unprecedented surge in their market shares. As the economy became more globalised, so did the health sector. Foreign companies started to take a keen interest in the British market. Today, ‘Medi-Partenaires’, ‘Tokushukai’, ‘Kaiser Permanente’, ‘Asklepios-Kliniken’ and others are household names, but back in the early 1980s, they were exotic newcomers. Established providers resented them, but these newcomers brought new business models, new technologies and new medical know-how with them. Insurers also began to offer a greater variety of healthcare plans.
This period also brought greater variation in the extent, type and depth of vertical integration. This is a feature of our health system which often confuses foreign visitors. A lot of countries have a complete insurer-provider split, meaning that health insurance and healthcare provision are completely separate activities, not unlike car insurance and car repair services. In other countries, this split does not exist at all. Healthcare providers work more like gym chains, where members are entitled to use the facilities in return for a monthly fee. In the UK, both the ‘gym model’ and the ‘car insurance model’ exist – and so does virtually everything in between.
This means that there is not really such a thing as ‘the healthcare system’, but a great variety of different models of organising healthcare. To British people, the question ‘How does healthcare work in your country?’ makes no more sense than the question ‘How does leisure work in your country?’ would.
To be continued…
Dr Kristian Niemietz is the author of the IEA monograph ‘Universal healthcare without the NHS‘.
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