The NHS funding crisis

The NHS is ‘at breaking point’, ‘starved of resources’, ‘on the verge of collapse’, overstretched, underfunded, and everybody knows it. According to the Telegraph, “[The] NHS faces biggest financial crisis ‘in a generation’”[1]. “Yet as the NHS deals with the worst “cash crisis in a generation” we can disclose things are only going to get worse”, adds the Mirror[2].

Such articles often imply that there is nothing structurally wrong with the NHS – all it lacks is money. It is widely believed that, if only the NHS were ‘properly funded’, it would be second to none.

Proponents of this line of argument have a point. Funding constraints are real. The NHS has been protected from budget cuts, and there have even been modest real-term increases in spending (by 3.2 per cent between 2009/10 and 2014/15, Appleby et al 2015). But the increase in demand has been even greater. It is therefore likely that the more recent problems experienced by the health service – such as deficits and missed targets – are to a large extent a financial matter. But there are a number of problems with the tendency to ascribe every problem to ‘underfunding’, and with the eagerness to hold the NHS blameless.

Lack of revenue-raising powers

Firstly, we cannot treat funding levels as an external constraint which has nothing to do with the health system as such. In a fully tax-funded system, healthcare spending decisions will always be political decisions. The NHS’s budget will always be whatever the government of the day decides it should be. Sometimes we will agree with that government’s spending priorities, and sometimes we will not. This is a feature, not a bug. You cannot sensibly advocate a system which vests politicians with so much power, and then be constantly outraged when those politicians do not use that power in the way you want them to use it. Yet that is precisely what many of the most ardent supporters of the NHS do.

In insurance-based systems, such as the social health insurance (SHI) systems of Switzerland and the Netherlands, politicians cannot directly control the level of healthcare spending. Insurers are free to set their own premium rates, and if those rates are insufficient to cover their expenses, they can raise them. They do not have to ask politicians for permission first, or wait until a government sympathetic to their position is voted in.

In theory, one could imagine the NHS operating in a similar way: It could be given its own revenue-raising powers, e.g. an ‘NHS contribution’, comparable with National Insurance contributions, accruing directly to the NHS. But the monopoly status of the NHS makes this unfeasible in practice. Insurers in SHI systems can be given the autonomy to set their own premiums, because competition with other insurers prevents them from abusing it. If an insurer charges unreasonably high premiums, they will lose customers. The NHS, as a single-payer system, would face no such constraints, which is why it cannot be given quasi-tax-raising powers. It is therefore reliant on the government of the day for its funding.

Efficiency reserves

But whatever the funding mechanism, there is also good evidence that the NHS has more ability than other systems to benefit from greater efficiency. It has greater ‘efficiency reserves’ than most comparable systems. Healthcare spending in the UK is lower than in most neighbouring countries (see OECD 2015), and NHS supporters often jump from this observation to the conclusion that the NHS must be more efficient than other systems. This is, to say the least, a bit of a stretch.

The OECD has compiled an holistic estimate of health system efficiency (Joumard et al, 2010). It models health systems as ‘production functions’ which transform inputs into outputs, subject to external constraints such as lifestyle factors (consumption of tobacco and alcohol, fruit and vegetables etc.). They find that, given each country’s health spending and lifestyle factors, the UK has greater potential to improve outcomes than most other Western European countries. It is worth noting in passing that some of the countries which receive similarly poor efficiency scores also have structurally similar health systems. So, even though some European countries spend more on healthcare than the UK, it is nevertheless the UK which has greater efficiency reserves in the system. Others spend more, but they also appear to spend it better.

The deadweight loss of tax funding

A simple cross-country comparison of health spending misses the fact that different funding methods differ in the costs they impose on the wider economy. In terms of its economic impact, a pound of healthcare spending is not always equal to a pound of healthcare spending: it does matter how that pound is raised. Suppose one country financed its health system through a beer tax, and another, otherwise identical country, financed it through a wine tax. Other things equal, you would expect lower levels of beer consumption in the first country, and lower levels of wine consumption in the second country.

Now suppose, instead, that one country financed its healthcare system through a tax on labour, while another country financed it through a lump-sum tax not connected to any particular activity. Other things equal, you would expect lower levels of labour supply in the first country.

The comparison between a tax-funded and a premium-funded system is not that far away from this hypothetical example. Imagine that both in the UK and in Switzerland, health expenditure rises by one percentage point of GDP, leading to a tax increase in the UK, and an equivalent premium increase in Switzerland.

In Switzerland, health insurance premiums are flat fees. From the perspective of a Swiss family, they are a fixed cost which they cannot avoid or significantly alter, much like the cost of staple food or heating fuel. So the family would just have to accept the increase, and find savings elsewhere. But there would be no further economic cost, because there would be no change in people’s behaviour.

In the UK, the increase in healthcare costs would most likely lead to an increase in income tax, since this is the most important source of revenue at the national level. But this not the whole story. The tax increase would make working, saving and investing less lucrative, which means that, at the margin, people would reduce their engagement in these activities. Tax funding comes at a greater economic ‘deadweight loss’ than premium funding, because it changes people’s behaviour to a greater extent. Other systems can afford higher spending levels, because they are funded in economically less damaging ways[3].

Conclusion

There can be no doubt that the NHS is feeling the pinch. And yet the generally accepted view that the NHS would be a world-class system if only politicians increased funding should be called into question. Firstly, even if it were true that the service’s woes are entirely due to financial constraints, it would still be wrong to treat these as an exogenous constraint that is imposed upon the system by an outside force. Rather, it is part and parcel of a single-payer system that budgets are set by politicians, and as with any political decision, some of us will agree with it and some of us will not. In insurance-based systems, spending levels result from the interaction of demand and supply, not unlike in a ‘normal’ market. That level of spending may well be higher than the level politicians would have chosen. Insurance-based systems can also afford higher spending levels, because premiums come at a lower economic cost than taxes.

Having said that, even though healthcare spending in the UK is lower than in most neighbouring countries, OECD estimates suggest that the NHS has greater untapped efficiency reserves than most other systems. There is no discernible connection between spending levels and efficiency. The UK, Ireland and Finland are among the lower spenders, but they also receive some of the worst efficiency scores. Switzerland and Japan are among the highest spenders, but they also receive some of the highest efficiency scores. It is possible to spend large sums of money well, and it is possible to spend lower sums wastefully. But, whatever the current spending level, it seems a sensible rule of thumb that the countries which are furthers away from the efficiency frontier should seek to move closer to that frontier first before considering further increases in spending.

Dr Kristian Niemietz is the IEA’s Head of Health and Welfare, and a Research Fellow at the Age Endeavour Fellowship (AEF). He is the author of our ‘NHS tetralogy’:

This article was written for the Spring 2016 edition of EA Magazine.

References

Appleby, J.; B. Baird, J. Thompson, J. Jabbal (2015) The NHS under the coalition government. Part two: NHS performance, London: The King’s Fund.

Joumard, I., André, C. and Nicq, C. (2010) Health care systems: Efficiency and institutions. OECD Economics Department Working Papers, No. 769. Paris: OECD.

OECD (2015) OECD Health Statistics 2015, available at http://www.oecd.org/health/health-data.htm






[1] ‘NHS faces biggest financial crisis ‘in a generation’’, Telegraph, 09 October 2015.



[2] NHS facing worst ever winter as Tory hospital cuts could see 35,000 doctors and nurses lose their jobs’, The Mirror, 10 October 2015.



[3] This is a simplification. The Swiss system is financed through flat-rate premiums, but not all SHI systems are: The German system is financed through income-related contributions, and the Dutch system is financed through a combination of both. Income-related contributions act like a flat tax: the deadweight loss is lower than under a progressive tax, but higher than under a poll tax.

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.

7 thoughts on “Rebuttal: ‘The NHS is wonderful, just underfunded’”

  1. Posted 13/01/2016 at 15:16 | Permalink

    “You cannot sensibly advocate a system which vests politicians with so much power, and then be constantly outraged when those politicians do not use that power in the way you want them to use it.” But that is, of course what many people do advocate, however ludicrously – you only have to read The Guardian to see that is the case. Indeed, many of these people want the government just to hand over (ever more) money and be done with it, leaving the NHS staff to decide what they will provide and how.

  2. Posted 14/01/2016 at 23:33 | Permalink

    The point about efficiency is interesting, but given that the countries quoted with high inefficiencies have low spends and vice-versa, is there any argument that a higher spend leads to higher efficiency i.e. is this correlation in fact causation. The assumption is that inefficiency means that cost can be cut, but might it be that inefficiency is due to, for instance, low capital investment in efficiency measures whose benefits will only be reaped over the long term?

    Also, is it not slightly misleading to talk about “efficiency reserves” data from 2010, compared with spending in 2015?

  3. Posted 15/01/2016 at 13:35 | Permalink

    “You cannot sensibly advocate a system which vests politicians with so much power, and then be constantly outraged when those politicians do not use that power in the way you want them to use it. ”

    Yes, you can, actually. If you are in favour of government provided healthcare you should also arguably have a say in how that is provided. And this can go beyond simple voting rights for one platform or another, but indeed by protests and social media activism etc. I just don’t see this as a valid argument, especially if one is to consider the point of view of left – of – centre voters rather than IEA readers.
    Perhaps a better way to appeal to such readers is by pointing out the fact that, as The Economist has put it, the Health Secretary has a mandate awarded by voters to implement such changes in the NHS.

    “But there would be no further economic cost, because there would be no change in people’s behaviour.”

    I really don’t see why this would be the case. If we accept that a higher tax on labour will influence its supply, we can also accept that a higher cost to consumers through increased premiums will also have an effect through either reduced consumption (as there is less disposable income) and/or reduced savings, depending on people’s propensity to spend/save.

    “The UK, Ireland and Finland are among the lower spenders, but they also receive some of the worst efficiency scores. Switzerland and Japan are among the highest spenders, but they also receive some of the highest efficiency scores.”

    The typical voter will infer from this that higher funding is necessary for increased efficiency. And that may not even be incorrect, based simply on this statistic. A more elaborate version of this argument could say that under a certain point underfunding leads to deteriorated efficiency as the provider struggles to allocate the resources which are too few compared to its needs. It certainly does not follow that “There is no discernible connection between spending levels and efficiency.”

  4. Posted 15/01/2016 at 14:14 | Permalink

    @Tudor – The point being made was not that high spending countries are more efficient, just that low spending is not automatically associated with higher efficiency nor higher spending associated with lower efficiency. Nowhere does Kris say that higher spending countries as a whole are more efficient. Indeed, if you read the OECD analysis, it says that the UK spends about the average of OECD members but is clearly well below average when it comes to efficiency.

  5. Posted 15/01/2016 at 14:52 | Permalink

    And my point wasn’t that either. Rather, it is that this is what the average , free market sceptical reader (especially when it comes to healthcare) will understand from the information the author conveys. Especially from the fragment I have quoted. It wouldn’t have hurt to include for example your information about UK spending about the average of OECD. All the author says is it “spends less than its neighbours”, “it is less efficient than other countries”. The average reader will get the exact opposite of the idea that the author is trying to put across.

  6. Posted 15/01/2016 at 17:56 | Permalink

    @ Abbas & Tudor: I didn’t say that better-funded systems are GENERALLY more efficient, just that this combination is POSSIBLE. There are also systems that are classed as efficient that spend little (e.g. South Korea), and systems that are classified as inefficient that spend a lot (e.g. the US).

  7. Posted 29/04/2016 at 15:55 | Permalink

    Hi Kristian – enjoyed your paper “Diagnosis Overrated” and “A Patient Approach”. I (begrudgingly, as a doctor!) have to agree with the premise that doctors enjoy being paternalistic, and are generally not keen to allow patients to dictate the terms of an appointment. The description of Friendly Society members as unpleasant patients is very familiar; although you may think that the NHS suffers from “producer capture” currently, the flip side is that patients have access to a free service which they know they are entitled to and for which it costs them nothing to attend and re-attend via A&E or the GP whenever it suits them. The generations who hallowed doctors and apologised for “wasting time” are gone; we now see angry people with expectations that far exceed what the service is able to supply.

    I would love to see a service that is not beholden to useless targets and initiatives, entirely devoid of evidence and set up by middle managers justifying their jobs. Imagine: A patient is admitted to a ward unnecessarily because A&E insist on never breaching their 4-hour target. The nurse admitting the patient to a ward now has to fill in a whole booklet, filled with tickboxes and “assessment tools”, as she asks an otherwise fit and well 20 year old if they have problems with their memory, or if they can care for themselves and so on. The doctor reviews them and immediately discharges them (they never needed to be admitted in the first place), a process which takes only a few minutes compared to the time taken on nursing bureaucracy and the ubiquitous discharge summary that then needs to be completed.

    Surely most patients would gladly choose for much of this to be scrapped, if it meant that their wait for operations was shorter, their nurse could attend more to their actual needs and so on? Wouldn’t it be wonderful to see a hospital freely providing evidence-based care mixed with common sense, rather than the ridiculous defensive wall of paper we now have to contend with!

    However, I do have a question: Inevitably, due to an article online or the feeling that they want every investigation performing, patients often request inappropriate investigations. A classic example is Ca125, a “tumour marker” for ovarian cancer that is in fact also raised in many transient and benign pathologies, and has been shown only to cause unnecessary invasive examinations and stress for patients if used as a screening tool – it should only be used in conjunction with other tests when symptoms present. Nevertheless, patients who feel “my GP missed my cancer” (rightly or wrongly) regularly campaign for the test to be used more widely, despite the evidence.
    In this situation (and many similar ones), a good doctor should refuse to do the test – “first do no harm”. But inevitably, patients as consumers will have an effect such that unscrupulous doctors who give the patients what they want will succeed where those who follow the evidence fail.

    It is easy to put one’s foot down with state funded healthcare – “this is of no benefit and may actually be harmful, I’m not doing it.” But if the patient is paying directly, it’s less straightforward. Sometimes in medicine tough love is required (and I’m not just referring to lifestyle choices like smoking cessation or weight loss).
    Doctors don’t like the idea at having to appease demanding patients – partially through professional arrogance, to be sure, but partially for the above reason – that it will lead to a compromise in ethical practice.

    Do you have any thoughts on this, and how the negative effects might be avoided in a more competitive, consumer-patient system?

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