Yes, of course private businesses can run acute hospitals

Hinchingbrooke hospital has had a history of ups and downs. In the 2000s, it lost control of its finances, running up debt of £40m. It also slipped in the hospital rankings of clinical outcomes. By 2009, Hinchingbrooke was on the brink of collapse, and its desperate situation led the then government to a highly unconventional (by British standards) response: The management of Hinchingbrooke was to be outsourced to a private company.

Initially, it was a success story. Under the management of Circle Health Ltd, Hinchingbrooke’s finances were consolidated, and clinical outcomes improved. The healthcare consultancy CHKS rated it as the best hospital trust in England in the category ‘quality of patient care’.

But in 2015, Circle’s rate of return fell drastically, prompting Circle Health to pull out and hand back the management of the trust to the NHS. In the media, this was widely presented as the proof that the worlds of medicine and the world of business do not mix well, and are best kept apart. The BBC argued:

“It is difficult to imagine a more significant moment in the whole debate about the provision of health care in Britain. […] [T]here is a pretty simple answer to the question can a private business run an acute hospital. And it’s no.”

The Guardian called the event “a heavy defeat for an ideological solution that can work well in manufacturing or retailing, but runs into problems in healthcare”.

What the episode really showed was how parochial and inward-looking our healthcare debate still is. There is a general political appetite for learning from international best practice: All major political camps are prepared to look abroad for policy solutions that have worked elsewhere, and that are compatible with their values. But healthcare remains the exception.

You would not guess it from the way the issue is covered in the British press, but in other developed countries, there are literally thousands of examples of hospitals that are owned and run by private organisations, and which are nonetheless open to everybody. In France and Italy, two countries one can suspect of many things, but not of exaggerated faith in markets and private business, the private for-profit sector accounts for about a quarter of the hospital sector. In social-democratic Germany, for-profit providers hold a market share of nearly one third.

Figure 1: % of hospital beds owned by the independent sector

-based on data from OECDStat.Extracts (2015)

This combination of public funding and private provision is not particularly difficult to arrange. All you need to do is pay private companies in the same way in which public sector organisations are paid, and give patients free choice of provider.

In principle, this can be arranged within a single-payer system like the NHS as well, and to a limited extent, it is already happening. In the mid-to-late 2000s, patients were given choice of providers at the point of referral, and a payment system under which ‘the money follows the patient’ was devised. But it is most easily achieved in social health insurance (SHI) systems, in which the funding and the provision of healthcare are not just notionally split (like in the NHS), but performed by entirely separate organisation.

A SHI system looks, at first sight, similar to a private health insurance system: People pay regular premiums to an insurer, consult healthcare providers when they fall ill, and their insurer then reimburses those providers for the cost of treatment. But the key difference is that social health insurers are not permitted to turn down applicants, to vary premiums in accordance with individual health risks, or to rule out coverage for pre-existing conditions. These systems also run risk structure compensation funds: Insurers pay into a common fund when they contract people in good health, and receive money from that fund when they contract people in poor health, so that insurers with very different risk profiles can compete on a level-playing field.

SHI systems come in different shapes and sizes, but the ‘purest’ examples can be found in the Netherlands, Switzerland and Germany. These systems easily outperform the NHS on a broad range of outcome measure. They generally record higher cancer survival rates, lower stroke mortality rates, fewer incidences of hospital infections and other complications, and lower rates of avoidable mortality. They also score higher on efficiency and equity measures.

Supporters of the NHS counter by citing the UK’s lower level of healthcare spending, and its higher ranking in the Commonwealth Fund study. These arguments are not incorrect, but they require some contextualisation. The Commonwealth Fund study places a high emphasis on equity, which it defines as the absence of financial barriers and coverage restrictions set by insurers. Since the NHS is not an insurance system, and since it does not use co-payments or other financial levers, it is bound to perform superbly in these categories. However, the absence of those barriers does not mean that British patients enjoy unlimited access to everything that is medically possible. It just means that the NHS rations healthcare in other, more subtle and covert ways, which the Commonwealth Fund study cannot measure. Despite biases of this kind, the SHI countries have come out in the Top 5 in every previous edition of the Commonwealth Fund study in which they have been included. Both the Dutch and the German system have already come out on top, and the Swiss system, although it has only been included once, came in second place. So even the much-hyped Commonwealth Fund study does not consistently rank the NHS above the SHI systems.

As for the difference in spending, this is at least partly due to the fact that SHI systems make it easy to top up statutory healthcare privately, which is not permitted in the NHS. Almost by definition, allowing additional private spending leads to higher overall spending, but it is voluntary spending, which should not be held against these systems.

In SHI systems, healthcare is still to a large extent publicly funded, and access is universal. But the state plays a much more limited role in the provision of healthcare, which has been partly, or (in the Netherlands) even fully transferred to the independent sector. The outcomes suggest that these arrangements are able to deliver high quality healthcare without compromising equity. They are nothing to be afraid of. Those who are interested in better health outcomes should abandon their inward-looking, insular perspective, and look around for international best-practice examples.

Dr Kristian Niemietz is the IEA’s Senior Research Fellow. He is the author of ‘What are we afraid of? Universal healthcare in market-oriented health systems‘ and ‘Health check: The NHS and market reforms‘. 

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).