The NHS: a dysfunctional insurer

The NHS is the dominant provider of healthcare services, but it is the dominant funder of services too. Nominally, the financing function of the NHS is a national health-insurance system: but it is a highly dysfunctional one.

For example, through their tax and National Insurance Charges, UK citizens have to pay for NHS services whether they use them or not. They are not paying simply to guarantee fair access for anyone who needs healthcare, regardless of their ability to pay; they are paying for their own NHS treatment, even if they decide not to rely on it. Instead of rewarding people for removing their demand from an over-stretched public service, in effect we make them pay twice.

Not surprisingly, many people believe that since they have paid for the NHS through taxation, they are going to extract the most out of it. While others believe that NHS services are somehow ‘free’, either because they do not pay tax, or because they are not charged at the point of use.

In either case, there is no limit to over-demand as there would be in ordinary commercial markets. With nearly all other goods and services, people face paying a price for what they buy – even if they are buying out of the benefit income given to them by the state. So they look at the value which different goods and services might provide for them, against the cost of acquiring them. But in health, where other taxpayers are bankrolling the system, there is no incentive for people to make the same value-for-money calculation. Instead, their every incentive is to get as much service as possible, no matter how marginal the benefit, since there is no price barrier against demanding more and more.

Likewise, there is no incentive for people to look after their health. In a private insurance systems, people who smoke or drink heavily, or who overeat, or who take no exercise, or are drug abusers, for example, might pay higher premiums than those who take more care of their health. But in the NHS, everyone pays on the same (tax) scale, so there is no incentive for personal responsibility.

Certainly, the NHS protects people who have higher than average risks through no fault of their own – for example, if they are women, or elderly. And it guarantees access to healthcare services even for the poorest families. However, it is easily possible to guarantee fair access to everyone without having to pay for the provision of an entire service. The government does not have to run supermarkets, for example, to ensure that the nation is fed. It simply gives cash benefits to poor families so that they can buy their own food – and shoes, clothing, and other essentials. And, empowered as valued customers of the providers, they then have access to the same competitive, value-conscious markets as the rest of the general population. Why does healthcare need to be different? A variety of solutions

So how can we promote value for money while ensuring access for all? There are many potential solutions to these funding problems.

One is the idea of Continental-style social-insurance funds. Here, everyone pays into a fund on a sliding scale, usually linked to income, so those with low incomes or no incomes pay nothing but are still members of the insurance system, and so are guaranteed good access to medical services. But the difference is that people can choose which insurer to belong to, so there is competition between the social-insurance providers. Naturally, customers try to seek out the providers that deliver greatest value for their compulsory premiums, and providers seek to outperform their competitors and deliver it. So there is a dynamic process that promotes improving value for money.

It is not necessarily easy to introduce a social-insurance system in the UK, because it requires us to establish a number of competing insurers and somehow to split tax contributions to them rather than all going to the Department of Health. But for a discussion of the general principle, which has much political support across the spectrum, see the ASI paper NHS Reform: Towards Consensus by left-wing journalist Anthony Browne.

Another solution is to rebate a large amount of the taxes paid by individuals, if they agree to limit or abandon their demand on NHS services and use only private or voluntary alternatives. This would mean that people were no longer trapped in an NHS that they did not like, but would have the financial empowerment to seek out their own choice of provider.

It would also put considerable pressure on the NHS to work more efficiently and to provide a better, more customer-focused service, so as not to lose this source of custom and finance. The rebate would not be 100%, because some of the tax paid would still be needed to provide services for those who were on low incomes but who still chose to stick with NHS providers. But it would be high enough that many families would at last have some means of escape, even if they had to top up the rebate by small amounts in order to exercise it.

Granting people the power to exit is arguably the only way to stimulate real operational reform in a state monopoly provider. For an analysis of how it might be made to work in the UK, see the ASI report by Professor Philip Booth, Getting Back Your Health.

A third suggestion is to create a more robust partnership between the state, private insurers, and patients themselves. Faced with escalating insurance costs, many US employers are now restricting the traditional comprehensive ‘first-dollar’ insurance schemes (very much like the NHS’s ‘everything is covered’ promise) that they provide for their workers.

Instead, they offer workers the choice to have only (much cheaper) forms of ‘catastrophic’ insurance, which covers major healthcare expenses only; and to remit to them all or part of the savings as deposits into ‘medical savings accounts’. The individual worker can use their MSA funds for any medical expenses that are not covered under the catastrophic insurance scheme, and often were not covered under the so-called ‘comprehensive’ scheme either – services such as stress counselling, weight management, or helping to kick drug or alcohol habits, for example.

The logic of this is that insurance still covers the big-ticket items – which people are unlikely demand just for the sake of it. But for middle-range items where there is an element of choice whether to demand a service or not, people face real value-for-money calculations, since these services have to be paid for out of the money they have in their Medical Savings Account. And for really small items – cough medicines or sticking plasters, for example – people pay out of their own pockets – much more efficient than getting them off the insurance, where the cost of processing a claim can be much greater than the value of the item itself.

Could such a system work in the UK? With the NHS being only the insurer for big-ticket items, and with the rest of people’s tax contributions going into new Medical Savings Accounts, perhaps on the ISA model? The ASI’s Dr Eamonn Butler thinks they could, as he outlines in his report Medical Savings Accounts.

Paying for mediicines is another real problem for the NHS. At first, they were free, but the demand suddenly rose so sharply that the postwar architects of the NHS were obliged to introduce prescription charges. Over the years, however, different groups have secured exemptions from prescription charges, so that now only a minority actually pay them.

Prescription charges bear no relation to the real cost of medicines. So (apart from chemists advising them that they might be cheaper to buy over-the-counter alternatives to their prescription item) there is no incentive – and not even any price information – to induce people to seek out the best value-for-money options. Furthermore, many people who could easily pay for medicines in fact pay nothing, simply because they are members of some exempt group (such as the over-60s, or nursing mothers). Meanwhile, less-than-wealthy people who have chronic conditions that can require a lot of medicine can be faced with high prescription bills.

Former NERA health expert Ian Senior argues, in his ASI paper Paying for Medicines, that charges should be based on the real cost of medicines and on the individual’s ability to pay; while to protect those who need a large volume of medicines, the total annual bill should be capped. Thus, people would face the real cost of medicines – inducing them and their doctors to seek out better-value alternatives where possible – but only up to a certain annual amount, which would be higher for wealthier people. This system, similar to that operating in Sweden, would create a more efficient use of pharmaceuticals while spreading the cost of medicines much more fairly than it is today.