Why lower healthcare spending does not mean greater efficiency

Commentators who celebrated the Commonwealth Fund’s health system rankings, in which the NHS came out as the best system in the world, did not fail to point out that most other countries in the sample spend much more on healthcare than the UK. This is not a new argument: supporters of the single-payer model have long presented the UK’s comparatively low health expenditure as evidence of the model’s superior efficiency. The NHS, they argue, may not literally be the envy of the world, but it is still a sensationally cost-effective way to provide acceptable standards of healthcare.

It is true that in terms of healthcare spending, the UK, while broadly in line with the EU and the OECD average, is still nowhere near the top group. In the social insurance systems of the likes of Austria, Switzerland and Germany, spending levels exceed British ones by about two percentage points of GDP. But NHS fans should not be too quick in claiming that this difference ‘proves’ the superior efficiency of the single-payer model. At least part of the difference has to be explained by the fact that social insurance systems make it much easier for patients to ‘top up’ or ‘upgrade’ statutory healthcare privately.

In these systems, patients can purchase optional extras, i.e. elements of a treatment that are medically sensible but not strictly speaking necessary. In the NHS, this is not just uncommon but explicitly ruled out: ‘You cannot choose to mix different parts of the same treatment between NHS and private care. For example, you cannot have a cataract operation on the NHS and pay privately for special lens implants that are normally only available as part of private care. Instead, you will have to either have both the operation on the NHS and a standard NHS lens implants, or pay for both the operation and implants privately.’  In a social insurance system, a mixing-and-matching of this kind would not be a problem.

A more common example would be the upgrade from a multi-bed room to a double- or a single room in a hospital. In Switzerland and Germany, statutory health insurance usually covers the cost of hospitalisation in a shared room, but patients can request an upgrade to a double or single bedroom, and pay the extra cost themselves. At Zurich’s Stadtspital Triemli, double bedrooms are available at an extra cost of CHF150 per day, and single bedrooms at CHF200. At Berlin’s Charité Virchow Klinikum, accommodation in a double room costs up to €40 extra, and a private room between €70 and €100. People can also buy supplementary private insurance to cover such costs. In Germany, a policy which covers the cost of accommodation in a private room costs about €17 per month for a 50-year old.

The option of upgrading also exists in the pharmaceutical sector. Most European countries operate systems of ‘reference pricing’, which essentially means that the statutory system reimburses the cost of a standard medication, but patients can opt for a more expensive alternative and pay the excess cost themselves. This would not be possible on the NHS. If you want a drug which is not available on the NHS, you can buy it privately, but you then have to foot the entire bill. Entitlement to NHS medication is not fungible, its monetary value cannot be ‘carried over’ and counted against the cost of a privately purchased alternative.

Of course, private supplementary healthcare exists in the UK as well. But it is much harder to mix public and private healthcare, because purchasing some of the latter usually means giving up a lot of the former. This strict separation of private and public healthcare is even reflected in everyday language: the expression ‘to go private’ would make little sense to people who are used to a mixed system which allows optional upgrades. In those systems, a patient does not ‘go private’ or ‘go public’. A patient receives a package of health services, has most of the cost reimbursed through the statutory system, but not necessarily all of it. So the terms ‘private’ and ‘public’ can describe a reimbursement status, but not the status of a patient. The patient is not a public Dr Jekyll who sometimes turns into a private Mr Hyde.

Other things equal, a country with a thriving supplementary healthcare sector will record higher levels of health expenditure than an otherwise identical country where no such sector exists, and probably without attaining better results in terms of broad health outcomes like life expectancy. But it would be a mistake to classify the former health system as ‘less efficient’ than the latter. After all, people who buy healthcare top-ups/upgrades in the former country do so voluntarily and at their own expense. The main point of these services is to ease discomfort and enhance well-being, not to improve clinical outcomes. Labelling these expenses as ‘inefficient’ would therefore be tantamount to labelling a fine-dining restaurant inefficient, on the basis that the food it serves contains no more nutrients than that of a canteen.

In terms of public spending, the NHS is not massively different from the social insurance systems of Western Europe. If total spending remains lower, it has less to do with superior efficiency, and more with the suppression of a private market for supplementary healthcare. Or in other words, with stopping people from buying goods and services that they value and would be prepared to pay for.

Private and public healthcare spending in selected countries, in % of GDP, 2012

Head of Political Economy

Dr Kristian Niemietz is the IEA's Head of Political Economy. Kristian 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). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).

5 thoughts on “Why lower healthcare spending does not mean greater efficiency”

  1. Posted 11/07/2014 at 15:43 | Permalink

    do these different levels of spending account properly for things such as the land cost of providing health care which may not be properly accounted for in state systems (or, for that matter, in some private systems, depending on property tenures and/or how accounting is done)?

  2. Posted 11/07/2014 at 16:40 | Permalink

    There is no reference in this article to health outcomes. If the UK spends less and achieves comparable outcomes, then, yes, it is more efficient regardless of how it is paid for.

  3. Posted 14/07/2014 at 07:34 | Permalink

    The Commonwealth Fund did not rate the NHS as the best in the world. Partly because it only compared 11 countries and partly because it contained almost no objective measures. Where it ranked the NHS near-bottom was on keeping people healthy and alive – which I would have thought was rather important. The OECD study (which was far more rigorous) rated the NHS as one of the least cost-efficient systems.

  4. Posted 16/07/2014 at 10:25 | Permalink

    @Philip, I’d say land costs only play a role for newly opened facilities, as most NHS facilities are part of its patrimony and already fully paid-off. Probably more important for independent sector centres, though.
    @Adam, but it does matter how it is paid for, because private and public spending have different objectives. The person who pays extra for a single bedroom with perks knows exactly that this will not improve clinical outcomes. That is not what they are trying to achieve. They want more comfort, and they are prepared to pay
    for it. Yet in the statistics, you will see higher spending without better outcomes.
    @HJ, to be fair to the Commonwealth Fund, they never said ‘best system in the world’. That is what the media coverage added later. What OECD study do you have in mind? Is that the one by Joumard et al (2010)?

  5. Posted 16/07/2014 at 10:36 | Permalink

    Kris – Here is a link to to the OECD findings:

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