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Analysis: Do the health reforms mean privatisation?

Analysis: Do the health reforms mean privatisation?

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In April, a solemn David Cameron, along with his Lib Dem deputy Nick Clegg and Health Secretary Andrew Lansley, announced a two-month 'listening exercise', in which the government would seek suggestions for 'improving' its controversial Health and Social Care Bill. The NHS reform plans have drawn strong criticism from health professionals and patient groups, and are viewed with ambivalence or outright hostility by much of the public.

Against this unfavourable background, the prime minister has been forced to calm an outburst of concern among Lib Dem ministers, who put on a show of independence after their party received an electoral drubbing in May. The chances of the reform programme being fudged are looking better by the day.

To some extent, all this is a surprise. Many of the changes are evolutionary, building on market-based reforms stretching back more than two decades. They need not have attracted this amount of scrutiny had they been presented with more competence. The fact that they have done so is largely the fault of government ministers (Tory and Lib Dem, and certainly not just Mr Lansley), who initially saw the plans as a good example of the young government's radical zeal, and proof of the stark contrast with the directionless and conservative administration of Gordon Brown.

The plans were warmly welcomed by supposed 'agenda-setters' such as the neo-liberal Economist, commentators on the right-wing broadsheets and many academics (at least once the plan to introduce price competition among hospitals was dropped). But they left much of the wider public cold.

One of the key problems for the government is the accusation that it is 'privatising' the NHS. Any government led by the Conservatives, whose history demonstrates a certain fondness for privatisation and a definite antipathy for universal, tax-funded healthcare (witness their hostility to the 'death tax' plan for financing long-term care), is vulnerable to this line of attack. But does the charge have any basis in reality on this occasion? The answer is that, while the claim that the government is privatising the NHS is misleading, private ownership of the means of producing healthcare will certainly increase, and that more people will be paying for their healthcare in five years' time than are doing so today.

It is useful to consider what privatisation actually means, and the best way of doing this is to start by identifying what it does not mean. Privatisation does not mean the creation of competition. It is possible for private ownership to co-exist with monopoly delivery – indeed, in an industry like healthcare, which is associated with substantial economies of scale, privatisation will often result in private-sector monopolies. On the other hand, competition can exist in the context of public ownership – as it did during the internal market in the 1990s, and as it has during the last decade in which the provision of healthcare has remained almost entirely within the public sector.

Nor does privatisation imply moving away from the pre-paid model of the NHS, in which care is delivered free-at-the-point-of-use. In many parts of the world, most healthcare providers are in the private sector, but care is delivered free to patients, or is charged for with the costs reimbursed. Meanwhile, in many parts of the low- and middle-income world, publicly owned facilities charge for the care they deliver. So the concepts of privatisation, marketisation and commercialisation are discrete – and the embrace by policymakers of one of these does not imply a desire to implement any of the others.

With these three concepts in mind, we can revisit the question of whether privatisation is actually in the Bill. In essence, there are two big ideas in the government's plans. The first will extend the scope of competition within the delivery of hospital care. This is not privatisation, it is marketisation – it is about the way in which health service providers are organised and the incentives they are subject to, not about who owns them.

On the other hand, there is quite clearly an element of privatisation here, since the plans will give private providers a more level playing field when bidding for work alongside state-run hospitals. While the precise details are the subject of intense debate within the coalition, the NHS will for the first time be made subject to economic regulation, which will include sanctions against anti-competitive behaviour.

Potentially, this will make it more difficult for commissioners to respect traditional referral patterns – ie, continuing to channel patients (and therefore money) to friends in NHS or foundation trusts, and ignoring upstart commercial providers that might be capable of delivering better care. There is also an explicit commitment to make NHS providers subject to European Union (EU) competition law, which helps to clear up past uncertainty about its applicability to public services and should further strengthen the hand of commercial providers who consider themselves unfairly treated by commissioners.

If, as seems likely, private delivery of healthcare increases as a result of this levelling of the playing field, then that involves a transfer of the means of production from the public to the private sector – and this is privatisation, quite straightforwardly. However, the importance of this process should not be over-estimated. The NHS in England already includes a substantial private sector component. About £4bn of care was bought from the private sector last year, which is only about 5% of the money currently spent by primary care trusts (PCTs), according to Simon Burns, a junior health minister. And that percentage does not look likely to increase significantly any time soon.

Monitor, the body that under (current) government plans will become the economic regulator, believes this proportion will remain relatively stable, at least in the short term. Speaking at the Cass Business School in London on 11 May, Monitor's chief executive said that private sector involvement was "likely to grow, even under current proposals, only slowly."

He also sought to differentiate the type of economic regulation he will be carrying out from that which occurs in the privatised utilities, such as water and energy. The key focus in healthcare would "not be competition per se but choice", he said, as this would provide patients with the "powerful tool" to decide who chooses their care, thereby putting pressure on providers to increase quality in order to attract more people through the door.

Indeed, the private healthcare sector is unconvinced by the scale of these changes and what they will mean for their businesses. They point out that a form of economic regulation is already exercised by the NHS co-operation and competition commission, which has, since 2008 (under the premiership of that well-known "roadblock to reform", Gordon Brown) made judgments on which mergers between NHS providers should be permitted, and on whether PCTs have acted fairly when commissioning, for example by refusing to include new market entrants when purchasing care.

This form of regulation has not produced a truly competitive NHS market. The panel has based its judgments on whether patients are likely to lose from a lack of choice, and it has often permitted mergers rather than opposing them when they have produced more integrated care that, in the commission's view, are in the patient's interest. The creation of a new regulator may strengthen the focus on competition rather than collaboration. But its duty is to introduce competition only 'where appropriate'.

While it has received less hostile attention, the second key idea of the reform plan, that of dismantling PCTs and channeling 60% of NHS funds to GPs, is likely to be associated with a much more meaningful amount of privatisation in our health system – and commercialisation, too. That becomes clear when one considers the underlying political motivation behind this decision, which is to transfer difficult decisions about rationing care to the most trusted part of the health service. These people will then take the wrap when, as seems inevitable, the depth of coverage offered by the NHS is materially reduced.

The cut to the size of the NHS is inevitable because of the funding outlook. The government is keen to proclaim its commitment to "real terms increases" in NHS funding, but in reality the above-inflation increases amount to just a fraction of 1%. In any case, the claim is misleading because healthcare costs in rich countries do not rise with Retail Price Index (RPI) or Consumer Price Index (CPI) – they rise at a much faster pace.

The King's Fund estimates that demographic pressures up to 2017 are likely to cost the NHS around £1.1bn-1.4bn extra each year at 2010/11 prices, and would require average real annual funding increases of around 1.1% in order to maintain the current capacity and clinical quality offered within the NHS.
The think tank calculates that, to offset the shortfall through productivity improvements, the NHS would need to make gains of between £21.6bn and £47bn, equivalent to improvements of 3.4 to 7.4% per year. As private-sector productivity growth averages around 2% per year, while NHS productivity has, at best, remained flat for the last decade, such gains appear fanciful.

There seems to be no doubt that pressure on public funding in healthcare will move more of the burden of care to the private, commercialised sector – ie, that part of the industry that relies on patients who pay directly for their care or who are privately insured, rather than that which seeks work from within the NHS, funded from the public purse.

With decisions on reducing the depth of care passed to trusted clinicians (or their agents), who are financially incentivised to manage patients' 'demand' for secondary or tertiary care, it is inevitable that an increasing number of patients will find that the services they need or want will not be available in the NHS, and will be forced to look elsewhere.

The widely predicted increase in waiting times will strengthen this effect, raising the prospect of 'middle-class flight', a process that has been largely forgotten about since the late 1990s. This is why health industry analysts such as Candesic are advising their clients to invest their money in the commercialised bit of the health sector, rather than those firms who are likely to seek work within the NHS.

So will the Health and Social Care Bill result in privatisation of the NHS? No, it will not – at least not directly. The reform on the hospital care side will give the private sector a better chance of winning work from NHS commissioners, but the sector is likely to play a peripheral role for the foreseeable future. Much richer opportunities are likely to accrue to the commercialised parts of the private sector, which generate their income from user fees or payments from private insurers (along with the insurers themselves).

In the context of increasing pressure on NHS resources, the creation of a class of commissioners who have strong incentives to deny people access to hospital care, and consequently the increasing risk of 'middle-class flight', the prospects for these elements of the industry are looking increasingly rosy, even if major changes are made to the Bill in the next few weeks. In the words of the industry analysts, if you're looking to invest in health companies, these are the shares to buy.

The author is Mark Hellowell, Lecturer, Global Public Health Unit, University of Edinburgh

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