Time to come clean about health spending

I was out of the country when the Office for Budget Responsibility published its Fiscal Sustainability Report, so I have a vaguely plausible excuse for missing it. That said, it sounds like it didn’t attract much comment. As you might expect, the FT and a couple of others covered it but, as Michael says, there wasn’t the usual hullabaloo. Which is surprising because its long-term forecast of public debt was worse than the one in the last report eighteen months ago. A lot worse.


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Chart by Michael O’Connor

The reaction to this, or lack of it, is a sign of how far politics has shifted in the past couple of years. A few years ago, The Debt was the biggest story around but Brexit has eclipsed it and with the OBR’s report being released on the same day as Theresa May’s speech it was never going to get much of a look in.

But, as Michael says, if, as most newspapers insisted every year, the level of debt forecast by the OBR was ‘unsustainable’, then this new projection must be super-plus-unsustainable!

So what has made the OBR debt forecast so much worse? Has there been a sudden deterioration in public finances?

As you can see from Michael’s’ chart, the public debt is a little higher than where the OBR thought it would be 18 months ago, mainly because tax revenues continued to disappoint. But that isn’t the main reason for the change. What is behind the soaraway debt forecast is a change in the way the OBR has assessed the likely increase in health costs.

This is not due to the ageing population, which the OBR factored into its previous estimates, but to other factors such as increasing demand and healthcare costs rising faster than inflation.  These assumptions were set out in a report last September, Fiscal sustainability and public spending on health, which would have formed part of last year’s FSR had it not been cancelled because of Brexit. The report notes that, even before the pressures of an ageing population, healthcare spending rose more quickly than GDP in most developed countries.

Michael illustrates the point with an example from the BBC’s Hospital series:

The BBC series “Hospital” that’s running at the moment has some great examples of this. For example in Episode 5, 18 year-old Deborah is saved because new developments mean that sickle-cell disease can be cured with a bone-marrow transplant from a donor who is only a 50% match rather than as previously requiring a 100% match. This means that of all the young people with sickle-cell, more can now be treated and will be treated, pushing up spending. Though the state can put into the other side of the balance the prospect of a healthy tax-paying life for Deborah! At the other end of the age-spectrum, the programme showed new procedures for heart-valve replacement for people who are too old and frail for traditional open-heart surgery, increasing the proportion of people within an already increasing pool who can be treated (and thus doubly increasing the number of operations that could take place).

In other words, because we can, we will. As more procedures become possible, more people will want them. Today a professor will sit on the breakfast TV sofa describing a new operation, tomorrow people will be beating on their GP’s doors demanding it. In a health service free at the point of use, innovation doesn’t reduce cost, it increases it.

Add to this the relatively high cost of medical equipment and of wages in healthcare. As the OBR comments:

Health care is a relatively labour intensive sector. For example, the King’s Fund found that staff accounted for around 70 per cent of a typical hospital’s total costs and that this proportion had grown over time.10 Cost and price pressures have generally been stronger in the health sector than in the rest of the economy, while productivity growth has tended to be lower. According to the so-called ‘Baumol cost disease’ theory, real wages in the health care sector have to keep pace with the rest of the economy in order to attract and retain staff, but slower productivity growth means that additional input would be needed to achieve the required improvement in care per person. As a result, the cost of health services will rise relative to other sectors of the economy.

Taking all this into account, much of the rise in health are costs in recent years hasn’t had as much to do with an ageing population as the headlines might suggest. For example, during the last financial year much of the increase in spending was due to other factors.

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Once you add in these extra cost pressures, the projections for health spending go through the roof. In the chart below, the green line is based on the assumptions the OBR used in its previous forecasts. The Central projection is the one used in calculating the increase in debt shown on Michael’s chart above. Even the ‘lower cost pressures’ scenario is still higher than the OBR’s previous forecasts.

screen-shot-2017-03-06-at-16-17-37

Now of course, these are only projections and these days it’s deeply unfashionable to take economic forecasts at all seriously. Who knows what will happen to the economy a decade or so from now? Nevertheless, what the FSR does show is just how sensitive the UK’s fiscal position is to changes in healthcare spending. Even before the most recent report, healthcare spending was the variable with the most impact on the UK’s debt trajectory. It dwarfs everything else, be it pensions, immigration or changes in interest rates. As Michael says, even the various migration scenarios don’t have anywhere near the same impact as the change to health spending.

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Chart by Michael O’Connor

Even if the OBR is only half right it is highly likely that healthcare spending will outgrow the economy from sometime early in the next decade. It is unlikely that efficiency savings will do much to mitigate this. The National Audit Office has expressed doubt about the ability of the NHS to deliver the sort of productivity improvements that would be needed to offset its financial problems and has suggested that some of the efficiency targets might even have made things worse.

Unless people are willing to accept rationing or to pay for more healthcare at the point of use, the only way to stop the NHS either falling over or pushing the fiscal deficit ever higher is for us all to start paying more tax.

Chris Giles reckons now is a good time for the chancellor to come clean with us about this:

Since Mr Hammond wants to leave big tax reform until his Autumn Budget, he can nevertheless use the evidence of strain in public services to prepare voters for paying higher taxes in future. Naturally this is difficult. The Conservative government was elected on a promise not to raise income tax, national insurance or VAT rates, but if it can ditch a manifesto promise to keep Britain in the EU single market, it can also think again about how best to fund public services.

As the Social Market Foundation said in their report on health funding just before Christmas, people see healthcare as the top public spending priority and have done so fairly consistently for the last three decades.

Screen Shot 2017-03-06 at 18.14.53

If anything is going to persuade the public of the need for tax increases, it is the pressure on NHS finances and the need to keep it properly funded into the next decade. Given recent developments and the worsening of NHS trust finances, it might be a good idea to have an honest conversation with the voters sooner rather than later.

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21 Responses to Time to come clean about health spending

  1. John says:

    Included in all the health spending figures are huge amounts of money being spent on additional tiers of management created by the Lansley Reforms, the added costs of PFI repayment programmes, the extra amounts being creamed off in the way of facilities management contracts, the sheer costs of lawyers and management consultants with yet another re-organisation of the NHS through STP, and the massive amounts of profits being made by private healthcare companies like Virgin Healthcare, etc.
    In their desire to reduce the cost and size of the NHS, the Tories have taken one of the best public healthcare services in the world and hollowed it out through progressive bouts of privatisation.
    It is that which is causing costs to rise astronomically, even though – at present – healthcare spending in the UK is at much lower levels than in most European countries and the USA.
    Unless and until the Tories stop asset-stripping the public sector for their own benefit and their friends in the City, we will all end up being losers from a steadily failing public healthcare system.

    • Dipper says:

      The issue of management costs and inefficiencies keeps coming up. Of course there are costs of management and inefficiencies. All large organisations have these.

      No-one ever asks whether pharmaceutical companies are top heavy with management and inefficient. This is because that are deemed to operate in a competitive market where competition will deliver companies as efficient as it is worth making them. A lot of the criticism of the NHS comes because there is no competition for it so no sensible benchmark.

      I think Rick has previously posted that the NHS has fewer managers than comparable large charities or other organisations.

  2. P Hearn says:

    Let’s start the honest conversation with an admission that the NHS is not the best possible healthcare system.

    Until we get over the delusion that the rest of the world envies the NHS, we’re not ready to start fixing it.

  3. David says:

    Excellent post that clarifies some of the cost pressures . I have long felt that we need to stop this fixation with it being ‘free at the point of delivery’ . Only at its very best is the NHS a good healthcare provider , other systems providing superior care and outcomes . The best achieve it by joint funding between provider and patient . How a government weans us off the ‘free’ fantasy is the problem .

  4. sdbast says:

    Reblogged this on sdbast.

  5. metatone says:

    The system is already rationed and could easily contain more rationing. But what is required is honesty about the necessity. Fantasies that co-pays will change demand profiles are largely nonsense, as comparisons with other countries show.

    • Blissex says:

      «Fantasies that co-pays will change demand profiles»

      Co-pays are a step in the way to health savings accounts, that is you get the health care your cash flow can buy, a very effective way of abolishing the insurance element and limiting demand by the vast majority of the population. It has worked “pretty well” for dentistry, if you shop in pharmacies in poor estates do-it-yourself fix-your-own-teeth kits are commonly available.

  6. The NHS is not the best healthcare system in the world, but it is the best combination of outcomes versus costs (as confirmed in repeated independent studies, e.g. the Commonwealth Fund). This is because of implicit rationing (largely through waiting times) and the economies of scale that a national service provides. Some of the current cost pressures arise from moves to limit rationing (driven by a media focus on expensive treatments and waiting lists) and the aggregate impact of privatisation (where direct cost savings produce indirect cost rises).

    There are two fundamental and related problems with the design of the NHS that have been present since 1948. First, the system was designed to prioritise the health of workers (and would-be workers, i.e. children). Second, the rationale for the NHS was that it would pay for itself in higher productivity (i.e. GDP, not the sector-specific kind of Baumol). This means the current funding issues are as a much a reflection of poor productivity growth and low wages as they are of medical advances and a growing
    dependency ratio.

    Ultimately, the biggest threat to the NHS may prove to be job polarisation, not an ageing population or advances in medical treatments.

    • Blissex says:

      «First, the system was designed to prioritise the health of workers (and would-be workers, i.e. children)»

      The impression I get from statistics that show that over 60% of use of NHS is by women (and 60% or more of the costs are paid by men) is that the NHS was designed to socialize the age-old arrangement that working men pay for the health care of their wives and mothers. Socialization that means that women who are not married or don’t have sons get the same subsidized NHS health care as those who do, as taxation revenue from from married men and sons funding the NHS is effectively redistributed from their wives and mothers to them.

  7. SK says:

    I think we need to look at the opposite direction. Where are the money that can pay for this?

    The only answer is housing. We need to capture our share of the HPI. Thus:
    -LVT
    -Removal of CGT allowances
    -Tax on Non-residents owners.

  8. Dafydd says:

    John Seddon (Vanguard Consulting) offers an alternative view, namely that demand is not really rising but “failure demand” is (i.e. the fact that “people […] keep returning because the system hasn’t solved their problems” – often and ironically a result of attempts to improve efficiency):

    “I have been outraged by media exposure misleading us all about the problems in the NHS. The media buy the Whitehall narrative; journalists have no idea what questions to ask. The narrative is ‘demand is rising’ (it is not, but failure demand is); ‘we have a problem with old people ‘bed-blocking’’ (while there are some, the greater problem with bed utilisation is people who shouldn’t even be there, people who are there longer than necessary and people who keep returning because the system hasn’t solved their problems – and the largest proportion of the latter are not old people).”

  9. John says:

    In response to Dipper and Dafydd above, the real basis for comparison as to management numbers and costs is pre-Lansley reforms and post-Lansley reforms.
    Does anyone have access to this information?
    As for ‘bed blockers’ locally – and, I suspect, nationally – this has been caused inter alia by reduced numbers of hospital beds and cuts amounting to £5 billion since 2010 in social care funding from central government.
    Put simply, the NHS is in a mess and getting messier by the day due to deliberate central government policies stretching back to 2010. It is all designed to smooth the way for total privatisation, the end of the NHS as we know it and the introduction of a US-style private health insurance system, with a third-rate service for those unable to afford private healthcare.

    • Dipper says:

      lots of discussion today and recently on a hypothecated NHS tax.

      I think this is a slippery slope. Once we have an allocated amount, people will start asking why they are paying so much and get so little. Who administers this tax in specific terms? Is there a separate governance structure for the NHS tax bit? Conversion of the tax into a quasi-insurance fund will shortly follow, followed by more use of the private sector.

    • Dipper says:

      … and one of the basic problems of the NHS is that it is both purchaser and provider. That leads to a clear conflict of interest that runs throughout the NHS. The most obvious solution is to become primarily a purchaser.

      I’m not sure why private involvement in the NHS is such a bad thing. Firstly, we already have it through drugs and medical equipment. Secondly, we accept it in many other parts of our economy.

      MRI scanners are produced by private enterprise. What would be wrong with going one step further, and private companies operating these scanners and paying individuals to interpret results, and offering the service to the NHS?

    • Dipper says:

      … and following up my comments from two posts ago, there doesn’t seem to be an easy way of charging people who are not entitled to use the NHS for its use, both because there doesn’t seem to be any effective way of checking entitlement, and because there isn’t any real guide to how much the treatment costs. The government insists that NHS tourism is not a primary cause of the crisis, but this is the same government that doesn’t know to within 50,000 how many people came here last year. In your interactions with the NHS have you ever seen anyone ask a question about entitlement?

      When it comes to drugs produced by private companies, they Know how much they cost and they make sure they get paid. So one of the first things that contracting out medical services instead of using “in house” services will do is force some much-needed discipline over demand verification and treatment costs.

    • Dafydd says:

      “It is all designed to smooth the way for total privatisation”

      Can you point to any evidence for this? It’s notoriously difficult to deduce intentions from consequences. If I fire a pistol at you but narrowly miss (consequence) what did I intend to do? The evidence is compatible with several conclusions:

      A. I intended to shoot you but missed.
      B. I intended to shoot Fred standing next to you, but missed and almost hit you.
      C. I intended to fire a warning shot (so missing you was deliberate).
      D. The pistol went off by accident (no intention of shooting you, Fred or anyone else).

      In the absence of additional evidence specifically on the question of intention (e.g. you shouted, “Fred, I hate you,” before you fired) all these possibilities are valid and there is no sound way of deciding between them.

      In the present case, you argue that the government intends total privatisation but the only evidence you offer is that the NHS is in a mess and that government policies have caused this. This is compatible with your conclusion, but it is also compatible with other conclusions (e.g. cock-up rather than conspiracy).

      Can you provide some evidence, please, that sheds direct light on the question of intention?

      • Dipper says:

        nicely done.

        to borrow a well-known saying, if there is a choice between conspiracy and cock-up, always choose cock-up.

    • Blissex says:

      «getting messier by the day due to deliberate central government policies stretching back to 2010»

      The usual wild optimism, here is from Ken Clarke’s:

      http://www.theguardian.com/politics/2014/jul/19/kenneth-clarke-views-no-10
      «His first challenge at health was heading off Thatcher, who “wanted to go to the American system”, he reveals. “I had ferocious rows with her about it. She wanted compulsory insurance, with the state paying the premiums for the less well-off. I thought that was a disaster. The American system is hopeless … dreadful.” He prevailed on her to take a different route by introducing more competition into the NHS. It became known – in a phrase he didn’t like – as “the internal market”. Ever since then, successive governments have pushed in broadly the same direction.»

      • Dafydd says:

        introducing more competition into the NHS. It became known – in a phrase he didn’t like – as “the internal market. Ever since then, successive governments have pushed in broadly the same direction.”

        I’ve never understood the enthusiasm of those on the Right (and Blairite Left) for this sort of thing (bearing in mind that most companies are run internally on similar lines, with cost centres etc.).

        Free markets have their defects but they do more or less work. By contrast, if the experience of the Soviet Union and Communist Bloc tells us anything, it is that pseudo-markets are the road to hell.

  10. John says:

    For an insider’s perspective on what has been happening to the NHS, I suggest you read “How to Dismantle the NHS in 10 Easy Steps” by Dr Youssef El’Gingihy, published by Zero Books in 2015.
    Dr El-Gingihy is a GP working in Tower Hamlets who has witnessed the changes brought about to the NHS over the last 25 years and writes with detailed authority on all the changes introduced since the “New” Labour era.

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