NHS sign
The Labour Party plans to increase national insurance contributions in order to raise an additional £30 billion for NHS spending. Not such a bright idea, given the obvious adverse effect on work incentives. If revenue ought to be raised, why not raise it in a way that gives rise to desirable side effects? There is a way to do that: user charges.

There is a lot of scope for user charges in healthcare. The UK is no longer much different from the European average, or the OECD average, in terms of total healthcare spending. But levels of out-of-pocket payments remain among the lowest in the developed world, both in relative (in % of total healthcare spending) and in absolute (per capita, PPP-adjusted) terms.

Figure: Out-of-pocket expenditure on healthcare, relative and absolute

Cost-sharing is the way to go, but the challenge is to get the payment structure right. Three options, by no means mutually exclusive, come to mind:

Proportional co-payments

NHS funding could be reduced from full cost absorption to, say, 95 per cent. Subject to an income-related annual cap, patients would pay the remaining 5 per cent of the cost of every medical service and product they receive. Unlike the flat co-payment schemes found in most countries, this would not just indiscriminately curb demand. For the first time since 1948, patients would ask whether the treatment their GP recommends represents value for money, compared to possible alternatives. Patients would begin to wonder whether e.g. a branded drug can be replaced by a generic one, whether they need to see a doctor when they could see a nurse in a walk-in clinic, or whether an inpatient treatment can be replaced by an outpatient alternative. Full-cost reimbursement could be retained for check-ups and other forms of preventive care.

Optional deductibles

Patients could agree to pay the first £X of all healthcare costs in return for a rebate of £Y, with X>Y. This is the way healthcare financing works in Switzerland. People can choose between five tiers of coverage, with higher deductibles leading to lower premiums. One advantage is the amount of self-selection. The high-deductible options will be systematically favoured by those who have good reason to expect that they have a fair degree of control over their healthcare costs. The rebates for the healthy are not financed by higher average premiums. The savings are achieved by people trying to push their healthcare costs from A to C when the rebate is B, with A>B>C.

Reference pricing

Under reference pricing, therapeutically equivalent drugs are clustered, and a common reimbursement level is set for the whole cluster, for example the average price. So if three drugs are broadly therapeutically similar, and if one costs £80, the other £100 and the third £120, then £100 would be the reimbursement limit. Patients could still get hold of the expensive drug, but they would have to pay the excess £20 themselves. This can be extended to all treatments, so that drugs would also compete with non-drug treatments.

These options can be sensibly combined. What they have in common is that they are more than just an attempt to foist healthcare costs off on patients. All three options systematically encourage cost-conscious behaviour; they are not so much about using less healthcare, but about seeking value for money when using it. What they also have in common is that they need not unduly disadvantage the poor and/or the sick, when caps and exemptions are applied.

What they would do, though, is undermine the infantile notion that the NHS represented institutionalised kindness and humanity, when it really is a nationalised industry run for the benefit of providers rather than patients. Undeserved idolatry thrives best in a money-free environment. Time to drain the swamp.


Head of Health and Welfare

Dr Kristian Niemietz joined the IEA in 2008 as Poverty Research Fellow, becoming its Senior Research Fellow in 2013 and Head of Health and Welfare in 2015. Kristian is also a Fellow of the Age Endeavour Fellowship. He studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). In 2013, he completed a PhD in Political Economy at King’s College London. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and at King's College London, where he taught Economics throughout his postgraduate studies. He is a regular contributor to various journals in the UK, Germany and Switzerland.