The Politics of NHS Market Reforms

“All public services have to be based on a diversity of independent providers who compete for business in a market governed by Consumer choice. All across Whitehall, any policy option now has to be dressed up as “choice”, “diversity”, and “contestablity”. These are the hallmarks of the “new model public service”
John Denham, Labour MP and former cabinet minister, quoted in the Chartist in 2006

This remarkable statement by John Denham summed up how market ideology had become the dominant model for delivering public services under a Labour Government. The proposed policies enshrined within the current coalition Government’s Health and Social Care Bill are even more pro-market.

My last two blogs explained how market failure was an inherent problem in healthcare. This clearly begs the question:

Why has the market model become the dominant model for delivering healthcare services not just in England, but all over the globe?

The Neoliberal Doctrine

Neoliberalism has been the dominant political, economic and philosophical doctrine of the last 30 years (see  Harvey D. A Brief History of Neoliberalism). It rose to prominence in the early 1980s after the collapse the Keynesian demand management economic model following the oil shocks of the 1970s, the problems of stagflation, and the collapse of the Soviet Union and the fall of the Berlin Wall.

It formed the basis of Thatcherism and Reaganomics and has continued in varied forms through the Major, Blair, and Brown governments.

Margaret Thatcher was heavily influenced by neoliberal thinkers like Friedrich A. Hayek and Milton Friedman. She famously slammed down a copy of Hayek’s “Constitution of Liberty” at a Conservative Party meeting and said “This is what we believe”.  

So what is neoliberalism?

There is no clearly accepted definition because it has complex roots in philosophy, economics, law and politics, but the central tenets underpinning neoliberalism are as follows: (eg See Rachel Turner’s book)

1.     Maximum market freedom, with minimum Government intervention

2.     Encouragement of entrepreneurial freedom, personal responsibility and self reliance

3.     Rejection of collectivism

4.     Protection of private property rights

5.     Public choice theory. A branch of market economic theory that views public servants as rent seeking utility maximisers, who aim to grow their own roles and the roles of Government.

The key policy levers of the neoliberal doctrine are as follows:

1.     Deregulation of trade and finance

2.     Supply side economic policies. Low taxation, especially corporation tax. Price stability i.e defeat of inflation by monetarist policy and minimising wage inflation by anti-union policies

3.      “Rolling back the state".  Privatisation of state owned premises, industries, and public services. Private finance initiative/Public Private Partnerships. Residualising welfare systems

4.     New Public Management (managerialism) i.e  Introduction of private sector management practices to the public sector

5.     Use of Social Capital i.e voluntary sector to provide public services. The Big Society is an example of this.

Despite the global financial crisis, which has been largely blamed on the failure of the neoliberal doctrine, the current coalition government is continuing to adopt neoliberal policies because it is natural territory for David Cameron and modern conservatism. In addition, the dominant Orange Book wing of the Liberal Democrats is also a proponent of neoliberal ideology. A very interesting article by Simon Kovar called The Neo-Liberal Democrats puts all of this into context.

I therefore believe that Ed Balls was accurate in his analysis of the current coalition Government in his candidacy statement for the Labour Party leadership in 2010:

"This is a new neo-liberalism for the 21st century – a merger of Thatcherite neo-Conservatism and Orange Book Liberals which believes that getting the state out of the way is the road to a stronger economy and fairer society"

In summary, neoliberals believe that free markets with minimal state interference are the best way to organise our economic system and society. Thus much of the public sector should be "rolled back" and/or replaced by the private sector. In theory this should shrink the size of government and reduce public expenditure levels, permitting lower taxation to allow the wealth creators more capital to invest in growing the economy, as well as more money for citizens to consume goods at lower prices. The least well off in society should then benefit from the "trickle down" effects of economic growth. Well, that’s the theory!

Some of the key policies introduced by Thatcher were aimed at abolishing capital controls and trade barriers, which was also strongly advocated at a global level by the World Trade Organisation, the OECD, the World Bank and the World Economic Forum. One of the most significant events was the deregulation and computerisation of the foreign exchange markets in the City of London in 1986 - known as "the Big Bang". The resulting massive increase in global financial trading is now widely accepted to have eroded the sovereignty of nation states. This is because governments must retain the confidence of international asset holders and the Bond markets by whatever policy modification is necessary, otherwise they could suffer the consequences of "capital flight", which could lead to severe economic consequences as seen in Greece and Italy, recently.

Tony Blair summed things up well in a speech to the Chicago Stock Exchange in 2004:

"Every day, £1 trillion is traded in the foreign exchange markets in the City of London. Any Government that thinks it can go it alone is wrong. If the markets don't like your policies they will punish you".

Gordon Brown also described how he felt at the mercy of the financial elite in a recent article for the Telegraph

“I was under, and Britain was under, relentless pressure from the City that we were over-regulating. All through the 10 to 15 years, the battle was not that we regulated too little, but that we regulated too much.”

The pressure from the global bond markets was a key reason why Labour became New Labour. Key policy makers like Peter Mandelson had accepted the "new reality" of financial globalisation, and that "Old Labour's" social democratic policies were no longer viable and had to be jettisoned in favour of policies in keeping with a neoliberal variant of Thatcherism - the "Third Way". (See "Losing Labour's Soul" by Professor Eric Shaw). Mandelson said, "We are all Thatcherites now".

Thus in opposition, the Labour party went on what was known as the “Prawn cocktail offensive” to woo city financiers and the markets. This prompted Michael Heseltine to famously state in a House of Commons speech:

“All those prawn cocktails for nothing. Never have so many crustaceans died in vain”

The abolition of the Labour party’s constitutional Clause IV further appeased the City, by denouncing nationalisation and emasculating the power of the Unions and the policy making ability of annual Labour party conference. For many commentators, this symbolised the end of Old Labour and the start of New Labour. In his Mansion House speech in 1997 Gordon Brown said that in order for a Government to succeed it had no option but "to convince the markets that they had the policies in place for long term stability".

Writing in the New Statesman in 2007, two Labour MPs, John Cruddas and Jon Tricket, provided a succinct explanation of New Labour’s approach:

 “After years in opposition and with the political and economic dominance of neoliberalism, New Labour essentially raised the white flag and inverted the principle of social democracy. Society was no longer to be master of the market, but its servant. Labour was to offer a more humane version of Thatcherism, in that the state would be actively used to help people survive as individuals in the global economy - but economic interests would always call all the shots”

Lady Thatcher, when asked what was her greatest ever achievement, famously replied:

"Tony Blair and New Labour. We forced our opponents to change their minds."

Thus New Labour instituted policies to suit the needs of international investors and the bond markets. These included granting independence to the Bank of England to remove it from state control - "depoliticisation", the defeat of inflation, prudent fiscal policy (the "Golden rules"), keeping corporation taxes down (including use of stealth taxes), promotion of the PFI (which kept public sector borrowing of the balance sheets), continued privatization of public services (raising revenues to keep taxation low and delivering investment opportunities for city financiers) , introduction of market forces and expanding choice in public services, remodelling state bureaucracy along business lines (New Public Management), and further deregulation of trade and finance.

In a speech to financiers in 2000 about opening up public services to private sector involvement, Gordon Brown stated that they would be investing in:

"core services, which the government is statutorily bound to provide, and for which demand is virtually insatiable. Your revenue stream is ultimately backed by Government. Where else can you get a business opportunity like that?" BBC File on Four

Other evidence for this approach includes other statements as follows:

Gordon Brown leaked letter to Confederation of British Industry 

“A reform agenda of choice and the use of competition and greater contestability , involving the independent sector, must be driven forward for public services”

Alan Milburn in the Guardian:

“Unless Labour made public services more like the market first, the Tories would just do it on their own terms”

Roy Hattersley, Labour MP quoted in the Guardian, 7^th November 2005

“The commodification of public space has now become an aggressive Blairite objective”

Stuart Hall, Emeritus Professor of Sociology at the Open University, argued that whilst the Labour Government retained its social democratic commitment to maintaining public services and alleviating poverty, its “dominant logic” was neo-liberal: to spread “the gospel of market fundamentalism”, promote business interests and values and further residualise the welfare system.

The consequences for NHS policy

Conservatives (1979-97)

The Conservative Government under Margaret Thatcher introduced the internal market into the NHS, as well as managerialism (New Public Management) through the Griffiths report. However, Thatcher understood that the NHS was a “Sacred Cow”, and the political consequences of more radical reform would be dire. Thus, Thatcher never got close to privatising the NHS. In a letter to Hayek, she alludes to the problem. (This is well worth a read)  

New Labour (1997-2010)

Labour’s initial health policy was opposed to privatisation of clinical services within the NHS. The 1997 White paper “The new NHS: Modern, dependable” watered down the “internal market”. The idea of patient choice was also off the menu, with Alan Milburn stating in June 2000:

“we are not prepared to trade off being free and fair, for efficiency and responsiveness to the demands of patients”

Health policy at this stage was about continuity and incremental changes, not radical reform - a Fabian approach. However, two major polices were neoliberal in nature.  Firstly, the Private Finance Initiative (PFI) was embraced by New Labour as a broad and long term political strategy.

PFI enabled public capital spending projects to be undertaken without adding to the Public Sector Borrowing Requirement (PSBR), thus keeping public borrowing “off balance sheet”. This allowed continued public service investment whilst still conforming to the Treasury’s strict fiscal rules, a key part of the Government’s “prudent” economic strategy. It also helped New Labour to win the confidence of the financial and business institutions. The NHS Private Finance Act of July 1997 removed the last doubts that the private sector had about the PFI and paved the way to billions of pounds worth of contracts.

Secondly, in keeping with strict fiscal policy, the first 2 yrs also saw Labour keeping to tight Tory spending plans.

However, the continued chronic underinvestment resulted in the Winter crisis of 2000 and prompted Tony Blair to appear on the BBC’s “Breakfast with Frost” show and famously promise that UK health spending would match the EU average within 5 years. The highly ambitious 10 year NHS Plan was announced soon after and Gordon Brown commissioned Derek Wanless to report on the financial state of the NHS. The report concluded that between 1972 and 1998, the cumulative underspend on the NHS compared to EU average spending was £267billion. A massive injection of money was delivered to the NHS increasing GDP spend from 5.6% to 9.4%. This came with strings attached - The subtitle of the NHS Plan, “A Plan for Investment, a Plan for Reform”, is important because it suggested that the government wanted something in return for its money (“Investment”) i.e significant changes to the way the NHS operated (“Reform”).

A pivotal moment came when Alan Milburn signed the NHS Concordat with the Independent Healthcare Association in November 2000 that stipulated that the private sector should be considered alongside NHS bodies as potential providers of clinical services. At the time Milburn, explained to the Guardian (30^th May 2001) that private sector would only be used to increase the capacity of the NHS and this was “not about introducing a mixed economy into healthcare”. However, by 2002, the plans for a market driven approach to healthcare delivery had become clear. In the document Delivering the NHS Plan: Next steps on investment and reform, it was stated that increased patient choice was to be accompanied by a market for healthcare. Moreover, Alan Milburn told the Health Select Committee that as long as care and treatment were freely provided by the NHS, whether it took place in a private sector hospital or a NHS hospital was frankly a secondary consideration.

Since then, the private sector has played an ever increasing role as the government took to the mantra of “what matters is what works”. There would be “no ideological barriers” to NHS modernisation and this was born out with publication of the NHS Improvement Plan in 2004, which prompted former Director of Strategy for the DH, Professor Chris Ham to state in an interview with the Financial Times:

“The foundations have been laid for the complete transformation of health care delivery. We are shifting away from an integrated system, in which the National Health Service provided virtually all care, to a much more mixed one, in which the private sector will play an increasingly major part. The government has started down a road which will see the NHS increasingly become a health insurer”

Choice, competition and diversity were the key policy levers to create a patient led consumerist healthcare market in the English NHS, resulting in the most radical departure from previous Labour policy.

Choice, accompanied by Payment by Results (PbR), is the main driver for market-driven healthcare and privatisation, and is seen as a mechanism to increase institutional efficiency, overcome producer/provider interests and empower the public. PbR was described by the Financial Times’s Nick Tmmins as the reform “which makes everything else possible”.

A detailed discussion of the full range of New Labour initiatives and policies promoting the marketisation and privatisation of parts of the NHS is outside the scope of this article, but the following list provides plenty of examples:

1. Independent Sector Treatment Centres (ISTCs). Please refer to BMJ article by Pollock and Godden for a detailed analysis.

2. I(CATS) - ((Integrated) Clinical Assessment and Treatment Services) – These units act as intermediate steps between Primary Care and Secondary care, but importantly have power to refer on to ISTCs

3. Privatising GP services through Alternative Provider of Medical Services (APMS).

4. Darzi Polyclinics

5. Unbundling of Primary Care. Services broken up into saleable commodities. GPs provide core services, which can be “topped up” either by GPs or private providers

6. Privatisation of NHS logistics (sold to DHL (Novation)), Oxygen supplies, pathology services (£1 billion over 5yrs), ambulance services, and offshore medical secretaries

7. Advertising of health services

8. Independent sector use of the NHS logo. Private companies providing services as part of the Extended Choice Network can now use the NHS logo

9. Patient held budgets.

10. Top up fees for new drugs and technologies. The recent Richard’s review has suggested that patients should be allowed to top up their NHS care in the private sector.

Two former New Labour Secretaries of State for Health provided further evidence for New Labour’s increasing privatisation and marketisation agenda. Patricia Hewitt said that “no arbitrary targets should be set for limits on one provider or another”. Following placement of an advert in the European Journal by the DH Commercial Directorate inviting expressions of interest in managing the purchase of clinical services from health care providers (through the Framework for procuring External Support for Commissioners (FESC)) Frank Dobson said:

“If this is not privatisation of the Health Service, then I don’t know what is”

Coalition 2010 –

The current Health and Social Care Bill is a blue print for a full blooded external market and a radical extension of the above polices. It will lead to increasing privatisation and marketisation of the NHS and the demise of the NHS as publicly provided service. Over time, we will see a move towards a mixed funding system of healthcare with only selected NHS core services provided by the state - a minimal safety net.

According to Whitehead, Hanratty, and Popay from the Dept of Health Inequalities and Social Determinants of Health, University of Liverpool, the current reforms are:

"ideological with little evidential foundation. They represent a decisive step towards privatisation that risks undermining the fundamental equity and efficiency objectives of the NHS. Rather than “liberating the NHS”, these proposals seem to be an exercise in liberating the NHS’s £100 billion budget to commercial enterprises." Lancet. 6th Oct 2010

Conclusion

According to Professor Rudolph Klein, the NHS is “A unique example of the collectivist provision of healthcare in a market society”.

That is precisely why those who are driven by neoliberal ideology want rid of the NHS -  collectivism is the antithesis of neoliberalism because it hampers the efficient functioning of the market. (Plant R. The Neo-liberal State. OUP 2009)

All three major political parties have adopted much of the neoliberal doctrine, which explains why they have all been guilty of undermining the founding principles of the NHS in favour of market principles.

However, they should all listen to the words of the BBC's Newsnight economics editor, Paul Mason:

"A deregulated banking system brought the entire economy of the world to the brink of collapse. It was the product of giant hubris and the untrammelled power of the financial elite. Basically neoliberalism is over: as an ideology, as an economic model. Get over it and move on. The task of working out what comes after it is urgent . Those who want to impose social justice and sustainability on globalised capitalism have a once-in-a-century chance". Mason P. Meltdown. The End of the Age of Greed. Verso. 2009 

Unfortunately, this opportunity was not grasped the first time around because the financial elite proved too powerful a global lobbying force. However, the ongoing second global financial crisis could sound the death knell for the neoliberal doctrine. This could result in less of a focus on market driven policies in public services like healthcare. We should remember the original purpose of the NHS was to sweep away the failed “market” of voluntary sector, private and municipal hospitals, through nationalisation. It was based on the idea of pooling of risks with everyone covered - “Universality” by a “Single payer” system. It recognised the importance of a healthy society, social solidarity and the social contract between doctors and patients. Surely now is the time to protect these principles against the Health and Social Care Bill which is indoctrinated with failed neoliberal ideology.

It would be tragic to see the NHS fall, just as its long time tormentor is dying. 

Details for final day's run into London on 15th January

On the final day of Bevan’s run on Sunday 15^th January, we will be setting out from the Travelodge hotel in the centre of High Wycombe at 9am.

Anyone that wants to join us should meet in hotel lobby at 8.30am at latest.

We will be running to Central London via Uxbridge and will follow the A4020 Uxbridge Road to Shepherd’s Bush and the join the A402 Baywater Road, running to Hyde Park on the northern side. We would welcome Hyde Park runners to join us anywhere along Bayswater road by Hyde Park (ETA approx 2pm, but subject to variation!).

We will then head towards Whitehall via Park Lane, Constitution Hill, Birdcage Walk, Great George Street, and finally onto Parliament Street and Richmond House.

Dr David Wilson and I will then deliver “Bevan’s Postcard” to the Department Health.

This will be followed by short speeches from myself, Professor Ian Banks (President of European Men’s Health Forum, BMA Council), Dr David Wrigley (GP from Lancashire, BMA Council), Dr Jacky Davis (co-chair NHS Consultants’ Association, BMA Council), Dr Lucy Reynolds (Research fellow LSHTM) and Professor Allyson Pollock (Queen Mary, University of London). I hope to also have an important mystery guest speaker (TBC)

Finally, David and I will run the short distance to Downing Street, to deliver another “Bevan’s postcard” to No 10. (Permission requested)

Hopefully, the following Monday morning Mr Lansley and Mr Cameron will then withdraw the Health and Social Care Bill!

Market Failure in Healthcare Part 2: Market failure in practice

Market failure in practice

The most significant piece of evidence that supports that view that market failure is an inherent problem in healthcare delivery is the widespread recognition that price competition worsens healthcare outcomes.

According to Zack Cooper from the London School of Economics:

 “Every shred of evidence suggests that price competition in healthcare makes things worse, not better.”

The NHS Confederation also shares this view:

“Economic theory predicts that price competition is likely to lead to declining quality where (as in healthcare) quality is harder to observe than price. Evidence from price competition in the 1990s internal market and in cost constrained markets in the US [United States] confirms this, with falling prices and reduced quality, particularly in harder to observe measures.”

It is therefore apparent that the price mechanism, which is the “invisible hand” of the market is fundamentally flawed in healthcare markets. This is why there has been a drive towards a system of fixed prices or “tariffs” in the NHS market. However, price fixing makes the whole concept of using a market system defunct. On this basis, is it even worth having a debate about market failure in healthcare? Considering the fact that market ideology in healthcare systems remains so dominant on a global level, I think some more proof is required with real world examples. So where better to start than the US healthcare system!

1. Market failure in the USA

The United States Healthcare system is a shocking $2.3 trillion example of market failure in practice.

Despite spending 18% GDP on healthcare, there are 50 million people uninsured and up to 100 million “underinsured”. According to a recent study by Harvard researchers, medical problems caused 62% of all personal bankruptcies filed in the U.S. in 2007. And in a finding that surprised even the researchers, 78% of those filers had medical insurance at the start of their illness, including 60.3% who had private coverage, not Medicare or Medicaid.

It is estimated that 30%-40% of the total healthcare budget is due to transaction costs of the

market. It is therefore even more alarming that 80% of healthcare bills contain errors. Insurance claim errors are estimated to cost $17 billion a year. There is also a huge problem with healthcare fraud, which is estimated at $70billion a year for Medicare and Medicaid. It is also somewhat revealing that US insurance companies refer to payouts for medical care as “medical loss”!

The cost of healthcare is rising dramatically in the US. The Milliman Medical Index measures the total annual cost of healthcare for a typical family of 4 covered by a preferred provider plan (PPO).  In 2002 it was $9,235. For 2011 it was $19,393. By 2025 the average annual cost of family healthcare insurance will equal the average annual household income.

The system also places a huge cost burden on employers, which is recognised as a major reason for poor competiveness of major companies like General Motors.  

However, the US market’s profit motive has resulted in huge gains for some individuals such as the CEOs of the major Health Maintenance Organisations. Stephen J Helmsley of United Healthcare is the world’s highest paid CEO. The former CEO of UnitedHealth was Bill McGuire was involved in $1.5 billion stock options scandal.

The Executive Vice President of UnitedHealth is Simon Stevens who was a former health advisor to Tony Blair. UnitedHealth has NHS contracts and is a member of the Framework for External Support for Commissioning (FESC), which was created by New Labour to supply commissioning support for Primary care Trusts (PCTs) and is now going to do the same for Lansley’s Clinical Commissioning Groups (CCGs). This is one of the mechanisms through which NHS privatisation will occur and was highlighted by a recent leaked document about Commissioning Support Units

Other examples of high CEO pay include Michael.B.Mccallister of Humana with a 2009 compensation package of $5 million with $50 million stock options, and Ronald A Williams with a 2009 compensation package of $24 million and stock options worth $170 million. (Source: Forbes website)

Despite the huge cost of the US system and the fact that the US has some of the best hospitals and medical care in the world, the US has poorer outcomes for life expectancy and infant/maternal mortality rates compared to other healthcare systems. This graph produced by the OECD is a shocking indictment of the US healthcare system.

Professor Allyson Pollock has eloquently described the US healthcare system as “islands of excellence in a sea of misery”.

Nowhere does that sea of misery look starker, than in the images of the charitable free healthcare camps that have sprung up throughout the US for the poor and uninsured, creating images that are more reminiscent of the Third World, than the world’s richest country. No wonder professors’ Woolhandler and Himmelstein from Harvard Medical School famously stated in a BMJ article, “Competition in a Publicly Funded System” that:

 “Only a dunce could believe that market based reform will improve efficiency or effectiveness”

What is even more worrying is that it is difficult to envisage how the US can ever move away from a market driven system. James K Galbraith (son of the famous economist John Kenneth Galbraith) made a remarkable observation in his book the Predator State (p132). He stated that no serious US politician would ever consider transforming the US healthcare system into a replica of Britain’s NHS:

“Such a move, if it reduced American Healthcare costs to British levels, would entail reducing total healthcare spending by nearly half. That would cause the medical sector to collapse and the economy to implode”

2. Market failure in the UK

The problems of market failure are already well recognised in the UK. Firstly, Scotland and Wales have both abandoned the purchaser-provider split.  In England, the problem of price competition is well recognised and most hospital tariffs/”prices” are fixed. Hence we don’t even have a proper market system in England - it is a “quasi-market”. This is a clear recognition of the problems with the free market in healthcare. However, any form of control over the market immediately makes it inefficient and price fixing is a bad as it gets for a market.

Thatcher’s purchaser provider split (1989) has been well critiqued in the literature and the recent

Health Select Committee (HSC) report on the current commissioning model was even more damning, suggesting that:

 “if it does not begin to improve soon, after 20 years of costly failure, the purchaser-provider split may need to be abolished.”

The HSC report also stated that research commissioned by the Dept Health from York University (Karen Bloor), estimated the administrative costs of the purchaser-provider split to be as high as 14% of total NHS budget compared to 5% prior to the purchaser-provider split. However, it should be noted that the DH doesn’t actually have any accurate figures because it hasn’t measured these costs. This was severely criticised by the committee.

Other examples of where the market has failed the NHS include the use of the Private Finance Initiative (PFI), the use of costly Independent Sector Treatment Centres (see Colin Leys and Stewart Player’s book, Confuse and Conceal and the National Programme for IT or Connecting for Health (CfH).

The NHS IT disaster is a classic case of market failure. One of its main aims was to help stimulate the NHS market by making information widely available to “consumers” (ie patients) so they could choose hospitals to be treated in. Electronic booking of appointments was part of this process and hence electronic transfer of patient records was also a key objective. This was clearly a highly complex task fraught with difficulties. In addition, collecting accurate outcome data in healthcare is extremely difficult and prone to error. This was clearly a gargantuan task, which was doomed to fail. In fact, there is evidence that the whole process was rushed by Tony Blair following a successful FOI Act request for secret Downing Street papers by Computer Weekly magazine. One of the slides that was published showed an IT structure with Payment by Results at the apex.

I believe that another key piece of evidence about market failure in the NHS is the problem of multiple re-disorganisations that have taken place since the introduction of market ideology. Nigel Edwards produced a fascinating report for the NHS Confederation, Triumph of Hope over Experience about learning the lessons from the history of NHS reorganisation.

A key statement was as follows:

“From 1948 to 1974 there was very little change in the institutional architecture of the NHS and relatively few organisations were created or abolished. From the mid 1980s onwards the pace of change has increased significantly.”

I thought Nigel Edwards was close to hitting the nail on the head when he said:

“The reasons for the increase in the pace of restructuring since 1980 are not very clear, but it may be that structural change is one of the few big levers available to policy-makers who find it very difficult to intervene in the ‘black box’ of clinical decision-making. It may be associated with the growth in popularity of the ‘new public management’ philosophy which prompted interest in the use of market mechanisms, the outsourcing of delivery functions and a general trend for previously neglected parts of the public sector to become subject to more direct managerial control.”

Rightly or wrongly, I would have taken the conclusion much further than Nigel Edwards, because I believe that market ideology is so flawed in healthcare, that there is a need for constant reorganisation to counter the problems of market failure.

I think another interesting point to ponder in the causes of multiple NHS organisations is that fact that Sir Keith Joseph (one of Thatcher’s key advisors) introduced the American Management Consultants, McKinsey, into the NHS in 1973 and they have been there ever since. Was it a coincidental that the reorganisations started to occur from 1974 onwards?

See this fascinating letter in the BMJ by Greenholm and Draper in 1973 about this issue

They quote John Cunningham in the Guardian (22 January 1973):

". . . more and more people are realizing that Sir Keith Joseph's managerial revolution - drafted by McKinsey's, the management consultants will take health care in all its aspects even further away than it now is from public surveillance and interest."

Market failure also results in the need for oversight by regulators (QUANGOs), such as the Care Quality Commission (CQC), Monitor, the Competition and Cooperation Panel (CCP), and the Reconfiguration Panel, none of which have covered themselves in glory to date.  Professor Chris Ham once described the Rules of the CCP as “written by a neoliberal economist on speed”! In fact, these Quangos might be considered as a form of market failure themselves and they certainly don’t come cheap.

The outsourcing and privatisation of Social Care is yet another topical and typical example of market failure in the English NHS. This is a whole issue in itself, which I may come back to one day.

Even the pro-market thinktank, Civitas, recently concluded in a recent report that improvements in the NHS were "not attributable to the market" and that the NHS was taking on extra costs "without realising the benefits" of the private sector.

There are plenty more examples, but in the interest of balance I should make the point that some research by Zack Cooper and Carol Propper has concluded that competition in healthcare saves lives. However, both authors recognise that price competition is harmful to patient care, which doesn’t help the pro-marketeers.

Government failure is also a problem and I will come back to that to.

3. Market failure in Holland

The New England Journal recently published a fascinating review of the Dutch system, which changed to a mandated private insurance system in 2006. It has not been a success:

“The Dutch experience provides a cautionary tale about the place of private insurance competition in health care reform. The Dutch reforms have fallen far short of expectations — a reminder that policy intentions should not be confused with outcomes and that managed competition is hardly a panacea. The idea that the Dutch reforms provide a successful model for U.S. Medicare to emulate is bizarre. The Dutch case in fact underscores the pitfalls of the casual use (and misuse) of international experience in U.S. health care reform debates. Before we learn from other countries' experiences with medical care, we first need to learn about them.”

Another paper in the Journal of Health Policy, Politics and Law (2008;33;1031) showed that the Dutch pro-competition reforms were also very unpopular with the public

4. Market failure and the Medical Profession

I have discussed this issue is some detail in a previous post about Clinical Leadership, but it’s worth summarising again because of its relevance to market failure in practice:

One of the less talked about aspects of market failure in healthcare is that fact that medical professionalism is intrinsically anti-market in nature. Doctors place the needs of patients first before their market power wants. Doctors also control access to the healthcare market, which becomes a fundamental problem to the proper functioning of a market if GPs prefer to refer patients to their local hospital. I therefore subscribe to the views of Professor David Marquand who stated that public service professionals “....are in a profound sense not just nonmarket, but anti-market”.

It is interesting that market theory in the form of Public Choice Theory rejects the idea of the public service ethos and medical professionalism. This theory views public service professionals as “rent seeking knaves” whose real purpose is to make money and legitimise monopolistic cartels. Professor James Buchanan of the Virginia school of Public Choice Theory (and Nobel Prize winner in Economics on this subject) famously stated in a fantastic Adam Curtis BBC documentary called "The Trap" that the public service ethos did not exist!

Professor Julian le Grand's "Knights and Knaves" analogy in his books Motivation

Agency and Public Policy and The Other Invisible Hand, explains how the "trust" (professional)

model of delivering healthcare is therefore problematic and best solved by using a market model, where the user (e.g. patient) is "Queen". Interestingly, Le Grand has admitted that in order for patient choice to work well, patients need “choice advisors”. I must say that I thought that GPs were choice advisors!

Paradoxically, this view of medical professionals as “rent seeking, knavish” self-interested agents

of business, feeds on itself. In the United States, where the commercialisation of medicine exists

in its most extreme form, the American medical profession has lost public support faster than any

other professional group. (Blendon R. JAMA 1989).

The attack on the medical profession over the last several years is consistent with the demands of

the market, which favours narrow economic priorities over the social contract and patient needs. This is also reflected in medical training, where there is significant evidence that Modernising Medical Careers was politically engineered to produce a flexible, “fit for purpose” medical workforce to

facilitate NHS market-based reforms:

“...most importantly, (MMC) will deliver a modern training scheme and career structure that will

allow clinical professionals to support real patient choice” (DH Website)

An editorial in the British Journal of General Practice described how the proposals for the

establishment of the Medical Education Standards Board (which later became Postgraduate Medical Education Training Board):

“…. are clearly intended to enable the Secretary of State of the day to direct that standards can

be lowered to meet the manpower demands of the NHS”

Since doctors and clinical leadership and followership are so crucial to successful healthcare reform, the market’s corrosive effects on medical professionalism, the social contract, and what it means to be a doctor, is clearly yet another example of market failure.

Summary

It seems there is overwhelming evidence that market failure is an intrinsic problem to healthcare. It creates a culture of citizen-consumerism that will only drive up healthcare costs leading to more expensive private insurance systems, which disadvantage the most vulnerable people in society that need healthcare the most. This is where the Inverse Care Law is most powerful. The market even rejects the public service ethos and social contract, which is so fundamental to the doctor-patient relationship – the very essence of medicine.

So if market driven healthcare is so problematic and prone to failure, why is it the dominant healthcare system model around the globe?

You can read my answer to this question in my next blog, but here is a clue:

It’s the Economy stupid! (and some philosophy and politics)!

Market Failure in Healthcare Part 1: Market Failure in Theory

Market Failure in Theory

All 3 main political parties in England are publicly signed up to a single payer (ie tax funded) system of funding the NHS. There is major evidence to support this model of healthcare funding including the Guillebaud report (1953), the Commons expenditure committee report (1973), and the Wanless review (2001).

In fact, Wanless identified a £267 billion NHS underspend between 1972-1998. One of his conclusions was as follows:

“The surprise may be that the gap in many measured outcomes is not bigger, given the size of the cumulative spending gap".

All 3 political parties also support the idea of a market based system of healthcare delivery based on a purchaser provider split internal market.

The key levers of the current NHS market (mainly introduced by New Labour) are the mutually reinforcing policies of:

1.     Purchaser-Provider split between primary care (PCTs) and secondary care (introduced by Thatcher’s Working for Patients White Paper)

2.     Patient choice to promote competition between providers

3.     Plurality of providers - Foundation Trusts, Any Willing/Qualified Provider Policy (AQP) - Private companies (eg Independent Sector Treatment Centres), “Third sector” non-profit organizations

4.     Payment by Results (PbR) using a tariff system

“PbR is the reform which makes everything else possible” Timmins BMJ 2005

5.     Patient held budgets

The market will be expanded under the proposed new legislation in the Health and Social Care Bill to an even more full blooded system, with over a third of the bill legislating for a new regulated external economic market.

So what is a market system?

The economist Roger Bootle eloquently described what a market system is, in his book The Trouble With Markets. Saving Capitalism from Itself:

“The essence of the market system is that free “agents” try to maximize their own “utility”, or wellbeing, by comparing the market prices for goods and services with what they are worth to them. Buyers buy when their own expected utility is greater than the price; sellers sell when the price is greater than their costs. Provided that prices are free to move, they will adjust to the competing forces of supply and demand. When demand exceeds supply, prices will be forced up. When supply exceeds demand, they will be forced down.

            The price changes send signals to producers to bring the amount of the different goods and services that are produced into line with what people want, and to consumers to bring what they want into line with what it is possible to produce, given the constraints imposed by limited resources and existing technology. In essence, this signaling mechanism enables the market system to wring the most out of any economic situation – not the best of all worlds, but the best possible result in the circumstances.

            This mechanism has two drivers; self interest and competition. Self interest drives “economic agents” to try and gain the most they can from any situation, and competition works to constrain how much they actually get. The success of the market mechanism depends on a continual interplay between these forces. Firms try to use any technological advance or economic change as a way of boosting their profits; the chance of doing this acts as a spur to seek improvements in efficiency and advances in technology. But as competition subsequently eats away any advantage they are temporarily able to acquire, the benefits are spread throughout society through lower prices”.

Market systems have brought great prosperity to the world and lifted millions of people out of poverty, but markets don’t work well in all situations, especially where there is significant information asymmetry between buyers and sellers, and imperfect competition. Healthcare is a particular area where market failure is a problem. In fact, market failure is an inherent problem in healthcare.

The theory of market failure in healthcare was first described by Professor Kenneth Arrow in 1963 in his seminal paper, "Uncertainty and the welfare economics of medical care".

Gordon Brown also addressed this issue in a speech to the Social Market Foundation (SMF) in 2003, which summarized the problems of market failure very well.  In fact Brown was so concerned that he stated the following:

“Indeed, the case I have made and experience elsewhere leads us to conclude that if we were to go down the road of introducing markets wholesale into British health care we would be paying a very heavy price in efficiency and equity and be unable to deliver a Britain of opportunity and security for all”

"The very same reasoning which leads us to the case for the public funding of health care on efficiency as well as equity grounds also leads us to the case for public provision of healthcare”. Gordon Brown, SMF speech 2003

Despite this statement, his Government was busily incorporating and implementing a market based system into the NHS!

The following non exhaustive list gives the main reasons for market failure in healthcare as outlined by Arrow, Brown and others:

1.     “Information asymmetry”

Markets are most efficient when buyers and sellers have equal information. However, in the case of the health care market, information is not equally shared between buyers and sellers. Instead the seller, the doctor, has far more information than the buyer, the patient. Patients are not sovereign in this situation ie patients are not well enough informed to make choices and the doctor (the seller) is actually their main “agent” or advocate. This means we are expecting our doctor to divide him/herself in half - on the one hand to act in our interests as the buyer of health care for us, but on the other to act in her own interests as the seller of health care. In a free market situation where the doctor is primarily motivated by the profit motive, the possibility exists for doctors to exploit patients by advising more treatment to be purchased than is necessary – this is known as supplier induced demand. Hence doctors' behavior has been controlled by a professional code of practice and a system of licensure. As Kenneth Arrow put it "The control that is exercised ordinarily by informed buyers is replaced by internalised values". These “internalized” professional values disrupt the efficient functioning of the market.

In the same mould there is asymmetry of information between “purchasers” (Primary Care - General Practitioners/PCT commissioners/Clinical commissioning Groups (CCGs)) and “providers” (Secondary care – hospitals) of healthcare in the purchaser provider split model of a market system. If GPs are buying specialist care from hospitals, it is the hospital specialists who have the information advantage because they are the experts in their chosen fields. This results in provider domination in the market and once again the problem of supplier induced demand. Hence, the growth of secondary care and super-specialism in medicine. Furthermore, it’s not just overtreatment that is problem. Undertreatment of non profitable conditions is also a problem.

2.     Healthcare is difficult and expensive to commodify

In a healthcare market, the illnesses and diseases of patients, and their treatments and investigations are the commodities that are traded. Thus illness and diseases and their investigations and treatments have a market value. Complex layers of bureaucracy are required in the commodification process such as HRG coding and pricing of procedures, “double accounting”, legal contracts, auditing, IT costs etc.

3.     Excess capacity is needed for market choice to work

If patients want to choose between hospitals in order to stimulate the competition that drives the market, there must be excess capacity in the system to accept extra patients, otherwise there will be waiting lists and a poorer service. This means some services will be idle in the system, creating inefficiency.

4.     “Exit” from the market is very difficult

Hospital closures are deeply unpopular with local communities and therefore a political hot potato. The Kidderminster Hospital and Wyre Forest episode of the election of the local health campaigner, Dr Richard Taylor, to Parliament is a classic case in point.

Even closure of some individual services can have a huge knock on effects, because many specialties are interrelated and rely on each other to provide comprehensive services to patients. You cannot run a trauma service without a vascular surgeon, for example – Someone needs to stop the bleeding! In addition, since income is related to hospital activity, closure of services and loss of income creates a vicious circle of financial pressures leading to further closures.

5.     Market “entry” is prohibitively expensive

Hospitals are very expensive complex buildings and contain expensive equipment and staff. To date, most private sector provider involvement in the NHS has been with smaller units such as Independent Sector Treatment Centres and “Darzi centres”. This links in with this issue of the costs of excess capacity

6.     Problems with private insurance systems

Private insurance gives the cheapest and best coverage to the well, and the most expensive and least coverage to the sick. This is a classic case of the Inverse Care Law - the poorest and most vulnerable need healthcare the most, but will get least access.

7.     Price signals don't work

Payment occurs after care in most cases. Illness is unpredictable and healthcare costs can be prohibitive e.g a stay on an Intensive Care Unit due to an accident could cost hundreds and thousands of pounds, which the vast majority of the population could not afford. Hence there is a need for risk pooling and insurance systems. As stated above, private insurance disadvantages the most vulnerable, so national insurance systems are naturally the best choice.

8.     Medical professionalism is anti-market

Market theory in the form of Public Choice Theory rejects the public service ethos and professional ethics. Medical professionalism is fundamentally anti-market in nature because Doctors (GPs) control access to the healthcare market and want to refer unwell patients to good local services. The doctor patient relationship and the social contract is fundamentally based on trust. Market systems rely on self interest and distrust. The market is a blind power without any social or ethical orientation.

I’ve previously discussed the problems of medical professionalism and the market here and will return to it.

9.     Patients want local services

Just as doctors like referring to local service, patients also like to use local services. The influential work by Professor Julian Le Grand on the British Social Attitudes survey, which showed the public did want choice of hospitals is fundamentally flawed, because it was a survey of the public, not patients. When you feel ill you don’t want to travel far and you also need to be close to your support network of loved ones and friends. It is therefore not surprising that Barr et al’s detailed analysis of patient choice had very different conclusions.

10.  Markets provide for wants rather than needs

Markets are driven by the wants of consumers rather than needs. This focus on citizen-consumerism, disguised as patient choice, serves to drive up healthcare expenditure, not reduce it.

11.  Need for specialty clusters, high volume workload and regional and national planning

Rare conditions or conditions that require highly complex treatments require specialty clusters and high volume workloads to ensure enough expertise for safe and effective care. This often requires the development of clinical networks and specialist centers, through local, regional and national planning based on local, regional and national population needs. This is again anti-market in nature.

12.  First duty of investor owned firms is to their shareholders, not patients

This results in the problem of “cream skimming”, where private sector companies will only treat the most profitable conditions, leaving the unprofitable cases to state providers. In a competitive external market system, the state providers (which provide comprehensive services to local populations) are therefore most at risk of failure.

This list is not exhaustive, but goes a long way to explain why market failure is inherent in the delivery of healthcare, which is close to a natural monopoly. It also explains why market systems are so costly and will eventually bankrupt a single payer system, where there is a finite amount of money.

My next blog will focus on market failure in practice, which will then be followed by another blog about why the market model of healthcare has been adopted on a global scale by the political classes, despite the inherent flaws in this model of healthcare delivery.