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Cure might work this time - Daily Telegraph December 24 2001

EVERYONE today - Labour, Tory, even LibDem - is thinking about the reform of the NHS: it has dawned on them that state monopoly may, just may, not be the right model. This is progress indeed. 'Twas not ever thus.

Reform of the NHS was high on the 1987 Tory government's agenda too; but because public opinion then was not ready for reform Margaret Thatcher had promised that the NHS would be "safe with us".

The NHS establishment and its academic hangers-on were in those days still telling us how wonderful the NHS was because it "cost so little"; they had fooled themselves that you could do owt wi' nowt. The usual indicators of general healthiness seemed to show that Britain was no worse, in some ways better, than other advanced economies.

But healthcare, like most supply-side policies, shows its results with very long lags. Now we can see just what a mess was created by such complacency. The record on cancer, heart disease and even such bread-and-butter things as the provision of artificial hips falls well short - to say nothing of cross-infection, poor patient care and variable operative success, as documented by the Wanless Report.

Back in the late 1980s the government chose the internal market - competition in supply - in spite of advice (mine included) to widen reform to tackle the demand side, introduce some charges and turn consumers into a health market force.

Now the Labour Government too is trying to boost the supply-side by similar ideas - bringing in supplies from the private sector and continental providers as a supplement to, perhaps even competition with, the NHS monopoly. But this is easy stuff.

Unfortunately, what past experience shows is that such efforts on the supply side are soon frustrated when there is no real market on the demand side. Under the internal market, hospitals were supposed to compete for patients sent to them by fundholding GPs; the taxpayer funds to pay for treatment would then follow the patient to the lucky hospital.

In a few places this did generate real competition; for example in big conurbations like Manchester, where several big hospitals competed around the easy-access ringway.

What the Thatcher government was trying to do was to implement a classical voucher system in all but name; every patient had an open-ended voucher for free healthcare to treat their needs, with those needs being policed by the GPs as the gatekeepers of the system.

That was the theory. But it ran into two big problems. First, half of GPs were unwilling to play this role and refused to be fundholders. Their funds were then effectively channeled direct to the Regional Health Authorities, which disliked intensely the idea of competition, as a challenge to their bureaucratic power of patronage.

With investment money from the taxpayer coming in any case direct to these RHAs, they were able to ensure that their favourite activities were kept in business regardless of 'competition'. Second, the private sector, which was supposed to provide competition to the big state hospitals, found itself being eaten for breakfast by the latter; flush with taxpayers' funds, these were now allowed to compete by offering paybeds at marginal cost.

Competition with a hugely dominant provider subsidised by the taxpayer is not a good idea for shareholders' money. So the private sector sued for peace; and rogue state hospitals that roughed up their fellow hospitals in large cities soon found that their RHA would take revenge. End of competition, even before New Labour arrived.

But all is not lost. The internal market experiment has left some useful legacies. First is the presence at last of a serious body of managers inside NHS hospitals, armed with some decent accounting tools and cost/benefit information - previously the doctors and other trade unions ran the NHS for producer convenience.

Second, the fundholder idea has caught on with most GPs: and by forcing all GPs to co-operate in large alliances of practices, the Government has made it possible to create a comprehensive fundholder system.

What of reform, then? Given public demands, any scheme will have to have a voucher in it whereby people can get access to healthcare if they cannot afford it. At present, as we saw above, everyone already effectively has a voucher to get free healthcare.

Only of course, as I argued here three weeks ago, it is not really free because there is a cost of waiting (or poor quality in other ways) which drives its 'price' to equality with the overt price of private treatment. Thus the voucher is not what it seems; and there is consequently endemic public dissatisfaction that means there is never 'enough tax' for the NHS.

Nevertheless, imperfect as this voucher is, we could maintain it and yet still tackle the supply-side of the NHS along the lines of the original internal market idea. Why not sell off the hospitals to private operators (or lease them out under the Public Finance Initiative perhaps) and disband the RHAs?

Then private shareholders would be providers of investment funds, just as they are in defence or old people's homes; and the GPs (safeguarders of the system's integrity) would buy current services on patient-taxpayers' behalf.

What of the voucher itself? To make it give meaningful value implies some sort of means-testing. If people who can afford private healthcare did not have the voucher then they could not join NHS waiting lists and so drive up the 'price' of 'free' healthcare. Then the poor who needed care would get it truly free, without waiting. This is what is meant when it is said that people should "normally pay".

Means-testing creates its own problems of incentives. We already have a great battery of benefit means-tests, extended substantially by Gordon Brown under his elaborate tax credit schemes.

But by creating an environment where everyone with an income was expected to take out private health insurance, perhaps compulsory up to some level, work incentives could be maintained given current pressures ('no fifth option') into work.

That points to some carrot (such as tax relief on insurance) and some stick (the voucher could not be used by people with income except for very serious conditions).

It is said things have to get really bad for reform to have a chance. On that basis NHS reform today has a very real chance.

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