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The Macroeconomic Case Against NHS Privatisation

Author: John Carlisle

The Conservative government has traditionally treated the NHS as a cost, not as value. This is because they do not understand the basic principles of running an effective organisation, the first of which is: “If you focus on costs then cost will GO UP” (Deming,1982; Seddon, 2019). In other words, reducing unit and transaction costs causes the aggregate costs to increase because this leads to focusing on the wrong things, e.g. on the cost reduction target and not on the quality of care. A classic example is the cost reduction targets set by the NHS CEO, Nicholson, in 2010, the infamous Nicholson Challenge, to take £20 billion out of the budget by “efficiency” savings. One of the immediate effects was 7,000 redundancies across the board, half of which were compulsory. By 2014 bed day delays had increased by 30%, and the quality of care and morale had dropped.

The socialist response must be to focus on the socio-economic value of the NHS and Social Care, and how this helps reduce inequality – and lowers the cost.

The Democratic Impact on the UK

The NHS treats nearly four times the population of the UK every year, affecting one way or another every family in England. 90% of the admissions come through GPs, the gateway of Primary Care and the community.

The NHS’ built assets are probably the most valuable of any institution in the UK, except for the government. Its human assets are incalculable, a unique combination of vocation, high intelligence and a tremendous work ethic.

It is a major sponsor and client of scientific development as evidenced by vaccine development, imaging, the extension of molecular diagnostics and the routine use of genomic testing in cancer services etc.

The False Economies of Privatisation

A regional example: The North West

The evidence here is taken almost exclusively from Dexter Whitfield’s The New Health and Social Care Economy (2015). The data are 6 years old, but the message is true today, perhaps even more so.

The North West had the third largest total regional Gross Value Added outside of London and the South East in 2013. The health and social care economy accounted for 8.6% of the region’s wealth in 2012. North West health expenditure was £15.1bn, the third highest in England, after London and the South East. 

Health services accounted for 14.5% of employment in the North West region in 2013, but this rose to 27.3% when the direct, indirect and induced employment was included for all ten elements of the regional health and social care economy.

A major employer in the local and regional economy

The NHS, public bodies, private and voluntary sector organisations in the North West directly employ 551,802 people. The same organisations purchase goods and services that support a further 129,433 jobs in the North West. The household expenditure of the directly employed workforce plus those employed in providing goods and services in the regional economy support a further 159,403 jobs. Thus, health and social care services in the North West generates 840,638 jobs (or 701,031 full time equivalents).

In addition, there were 781,972 people providing unpaid care in the North West in 2011, of whom 113,003 carers provided between 20-49 hours per week and 199,476 carers provided over 50 hours per week.
Multiply this across all the Regions and the contribution is enormous, especially the multiplier effect. The multiplier effect is the amount of added money generated by the spending of £1. All this in addition to the invaluable service provided in the population’s health and social care. 

[A note on the multiplier effect: The term is actually “fiscal” multiplier, and is an estimate of the effect on economic growth of government spending. A multiplier greater than 1 corresponds to a growth stimulus, i.e. returns of more than £1 for each pound spent. A multiplier of less than 1 is an indication of a net loss. Some sectors have a higher return than others, so, in Europe military spending causes a negative fiscal multiplier effect (weapons are largely imported), while health and education are positive. In fact, while total government spending in Europe has a multiplier of 1.61, health’s multiplier is 4.32 and we can expect the NHS to be in that region. Every pound spent on the NHS should thus generate another £4 available for spending, especially locally, except where it is spent on providers whose major shareholders are overseas or whose registered holdings are based overseas. This, therefore, must be one of the strongest fiscal arguments against privatisation and outsourcing – and not just in the NHS.]

The logical conclusion is that the government would make every effort to safeguard the NHS, as Don Berwick pointed out in 1998: “its cost, clinical excellence, and universality proved that a nationally organised, publicly funded, total system of guaranteed health care was one of the best public policy options for a developed nation.” (BMJ, July 4th, 1998). In other words, do not tamper with it! Successive governments have done just the opposite, treating it as a cost to be reduced at every opportunity and as a very, very expensive laboratory for neoliberal management experiments, e.g. PFIs, privatisation, outsourcing, performance measurement, targets etc.

Beginning with cost-cutting and efficiency and then major reorganisations, the NHS has been whittled down to the bone, and this has inevitably increased, not decreased, operating costs .

Cost-Cutting Policy and Resourcing Failures

General Practice  

Given that GPs treat 90% of the patients going on to Acute Care and are thus main monitors and channels of demand for hospital care, they should be the segment that gets the most care and attention. However, in 2016 the NHS in England was already around 6,500 general practitioners below the ideal number, predicted to rise to 12,100 short by 2020, with a corresponding impact on A&E and elective care waiting times.

NHS England stated in 2017 that GPs have one of the highest public satisfaction ratings of any public service, at over 85%, but the evidence is that improving access to primary care services is a top priority for patients. General practice is undeniably the bedrock of NHS care, providing over 300 million patient consultations each year, compared to 23 million A&E visits. But, if general practice fails, the NHS fails. Yet, despite a year’s worth of GP care per patient costing less than two A&E visits, less is spent on general practice than on hospital outpatients. For the past decade funding for hospitals has been growing around twice as fast as for family doctor services.

What has happened?

Primary Care has become the Cinderella of the DHSC. The GP discipline has been underfunded for over twenty years and overworked. The workload has increased but the resources have not kept up. Since 2010 there has been a 30% increase in consultant numbers but the number of GPs has fallen. England’s NHS lost nearly 600 full-time equivalent GPs over the past 12 months and has not recovered.

Given that General Practice sits in the heart of the community, is trusted and valued by the community and is the gateway to Acute Care it is strange that it is so neglected. It is rank bad leadership. No corporate leader would allow such a source of intelligence about the community and its health that would help manage demand to wither on the vine. They would be sacked by the shareholders for endangering the company and its users; but not in the NHS under a government where incompetence is no barrier to promotion.

While funding for Primary Care has increased, it not always been well allocated. For example, Social Care has been equally underfunded to the extent that the payments made by the NHS to local authorities worth £2.8bn in 2018 were in fact payments which end up in the independent sector. A Freedom of Information Act response provided by the DHSC in August 2019 to the Centre for Health and the Public Interest confirmed that the purpose of these payments was so that local authorities could commission nursing care and social care (known as either Funded Nursing Care or Continuing Health Care) almost all of which is provided by the independent sector. This is a scandal contrived by the Treasury.

Beds: By 2019 17,230 beds have been cut from the 144,455 that existed in April-June 2010, the period when the coalition Conservative/Liberal Democrat government took office and imposed a nine-year funding squeeze. The ratio of beds per 1000 population is 2.4. France is 6.5 and Germany is 8.3 – three times higher. Even the USA beats us at 2.9. 

Successive Health Ministers have not recognised what a false economy this was and damaging it is to patient care. This level of wilful blindness is truly stupefying. The policy has led to the NHS having smallest number of beds since records began in 1987/88, despite increased demand. The resulting 8,500 beds that were being blocked each day, for example in 2017, and the costs of staff, amounted to £3.5 million/day or £13 billion a year - a very high price to pay to save 17230 beds. It would also cover the rise in nurses’ pay that the RCN is demanding.

Add to this the rise of cancelled operations that could be directly linked to the lack of beds available. In efforts to help tackle the bed blocking crisis, nearly 100,000 operations were cancelled on the day during 2015 (Patient’s Association). This is no way to treat such vulnerable citizens.

Also add to this the number of ambulances not being available because they were being used to hold the delayed admissions into A&E. This is life and death, which appears to count for little to the Treasury-driven Tory health ministers.

Staff: In December 2019 the NHS was short of 106,000 health workers across the NHS in England, including over 44,000 vacancies in nursing. This is an increase from 2018 and is a direct result of chronic lack of government funding, particularly the 2016 scrapping of nurse training bursaries. The latter was a directive from George Osborne, who has never had to face the consequences of his Austerity calamity! The result is that health workers were working over a million hours a week of unpaid overtime to help the NHS cope with rising demand for care. Morale was rock bottom. Patient care suffered; but not Osborne’s conscience.

The Economic Cost of Privatising and Outsourcing

Most outsourcing and privatisation decisions are made solely on the financial effect on a particular budget and are justified by a belief in the value of competition. The full transaction costs are rarely quantified, let alone taken into account in the award of contracts, and significant other public costs are regularly ignored. Nor are other public sector costs taken into account such as the economic, social and environmental impact, the effect on staff terms and conditions, or the cost of making and supporting marketisation. The knock-on effect on the local economy, other public sector budgets and public policies is conveniently regarded as outside the responsibility of the contracting body. (Whitfield, 2015b)

Here are some examples of the hidden costs of attempts to cut costs by privatising and outsourcing:

First, a brief overview of the extent of tendering: In the year 2016/17, 267 (almost 70%) of the 386 clinical contracts put out to tender, worth £3.1 billion, went to the private sector in the North West alone. That is money removed from the public purse and not redistributed locally, or even nationally as some of the larger shareholders, e.g. hedge funds, are overseas. Across the NHS in 2018/19 £29 billion was spent by NHS England on the independent sector. If General Practitioners are excluded from this calculation, the figure is £21 billion or around 18% of total expenditure on the independent sector, not 7% as was stated by NHSE.

In total, between 2013/14 and 2018/2019 an additional £5.6 billion of NHS England’s budget went on the independent sector – an increase of 23%. In the main, this overall increase in expenditure on the independent sector is due to the increase in the amount that local Clinical Commissioning Groups (£4.3bn) have purchased from the independent sector. 

  • The average cost of undertaking a contract transaction is £5 million per organisation (The Dalton Review, 2014). The average value of the 267 contracts was £14 million. Add to that the average £5 million/contract cost. Assume there was a fifty/fifty split. The total cost to secure those contracts is about £1.3 billion of which the NHS paid £675 million. That is a waste that could have spent on improving patient care instead of going to Virgin or Care UK etc. The Centre for Health and the Public Interest estimated that there were around 53,000 individual contracts at work in 2018/19 which underpin the flow of money between the NHS and the independent sector. This is tens of billions.
  • Wasted bids and terminations cost £194 million between 2008 and 2014. That is £28 million a year, leaving the NHS coffers.
  • Increased administration costs: The NHS “...has traditionally scored highly on account of its low cost of administration, which until the 1980s amounted to about 5% of health-service expenditure. After 1981 administrative costs soared; in 1997 they stood at about 12%” By 2005 they were estimated to be “...around 13.5% of overall NHS expenditure” according to a study by University of York (House of Commons Health Committee, 2010). Taking account of changes in the definition and reclassification of management costs it is estimated that “…at least £5 billion of the NHS’s recurrent i.e. continuing, year-on-year running costs relate to the market” (Paton, 2014).

Not Included:

  • Private Finance Initiatives (PFI), of which there is a complete study and remedy available at the University of Greenwich (2018). Suffice it to say that the Department of Health was forced to provide a £1.5bn bailout fund to NHS Trusts with significant PFI projects because the trusts’ plans are not viable without some level of central support. A £1.5bn bailout fund was announced by the Government to help NHS Trusts struggling with the burden of the legacy of PFIs. “Seven cash-strapped hospital trusts have been identified as in critical need of the financial boost, which will be made available over the next 25 years.” (Brown 2012).
  • More trusts have since accessed this fund, particularly those engaged in mergers. On this basis, the £1.5bn allocation will be spent by 2027, well before many NHS PFI projects conclude. NHS Trusts are likely to require a further £1.5bn in additional support for PFI projects over the next 20 years.
  • Reorganisation costs of the utterly destructive 2012 Bill are estimated at £3 billion. The current Integrated Care Systems that merely replicate in a complicated fashion what would be done naturally by the NHS, Councils and Social Care.
  • Targets, which deflect attention from patient care, heighten anxiety, encourage gaming and change nothing. 
  • Governance: The combined cost of Monitor, NHS Trust Development Authority and CQC at £300 million in 2013-14. In terms of quality control this is called “driving in the rearview mirror”, i.e. inspection post hoc, instead of designing in systems that get it right first time. Consequently correction, not prevention, becomes the very expensive quality control option.

A good example of both these distortions is the tragedy of the Mid Staffs Trust, the Stafford Hospital in which there were hundreds of avoidable deaths and dreadful neglect. The Francis Inquiry Report (2013) found a deep rooted, pernicious cult of management, obsessed with achieving ill-conceived targets yet isolated and wilfully oblivious to day-to-day operational reality, and a chronic shortage of staff, particularly nursing staff, was largely responsible for the substandard care.

It also wondered why, over the course of a decade, did so many warning signs go either undetected or ignored by the regional and national supervisory and regulatory apparatus? “The multiplicity of bodies with regulatory and oversight responsibilities in the NHS seemed to be asleep at the wheel”. Despite health-care systems regulators and performance managers like Monitor, the Care Quality Commission, and the HCC the carnage went on for over four years to 2009. So much for the expensive investment in governance!

The deadly management cocktail of cost-cutting, targets and inept governance produced probably the worst instances of failure in NHS history. Did the politicians learn anything? Recent history says no.

References

Berwick D (1998) Looking Forward – The NHS: feeling well and thriving at 75. BMJ, Vol 317, 4 July.
Brown J (2012) ‘Struggling NHS trusts get £1.5bn bailout’, The Independent 4 February. 
The Dalton Review (2014) Examining new options and opportunities for providers of NHS care. London: Department of Health.
The Francis Inquiry Report (2013) Report of the Mid-Staffordshire NHS Foundation Trust Public Inquiry, HC (2012-13) 898 I-III (report) and HC (2012-13) 947 (executive summary)
House of Commons Health Committee (2010) Commissioning, Fourth Report of Sessions 2009-10, Vol. 1, HC 268-1. http://www.publications.parliament.uk/pa/cm200910/cmselect/ cmhealth/268/268i.pdf
Kotecha V (2019) Plugging the leaks in the care home industry – strategies for resolving the financial crisis in the residential and nursing home sector. London: The Centre for Health and the Public Interest.
Mercer H & Whitfield D (2018) Nationalising Special Purpose Vehicles to end PFI: a discussion of the costs and benefits. London: The Public Services International Research Unit (PSIRU). [First edition: April, Second edition: October 2018, including appendix with critical comments on CHPI paper].
Paton C (2014) At what cost? Paying the price for the market in the English NHS. http://chpi.org.uk/wp-content/uploads/2014/02/At-what-cost-paying the-price-for-the-market-in-the-English-NHS-by-Calum-Paton.
Whitfield D (2015) The New Health and Social Care Economy. Duagh: European Services Strategy Unit Research.


The publisher is the Centre for Welfare Reform.

NHS The Macroeconomic Case © John Carlisle 2021.

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