The Affordable Care Act has been in place for a while now, and after the initial teething problems it is beginning to settle down into something resembling a functioning system, and serious health policy researchers are beginning to report on its progress. The New England Journal of Medicine (NEJM) reported in July on a series of measures of progress under Obamacare, and the results were generally positive.

The NEJM article covers some of the more controversial aspects of Obamacare, and also shows how hard it is to understand health financing policy (and outcomes of that policy) in the USA. It notes that 7.8 million young Americans are now covered under their parents’ health insurance where previously they wouldn’t have been, and also notes that this policy has been one of the most popular aspects of Obamacare. In calculating coverage more generally it has to consider the conflicting effects of the medicaid expansion and the newly-affordable bronze plans on the one hand, and cancellations of existing plans on the other. In total, the article concludes

Taking all existing coverage expansions together, we estimate that 20 million Americans have gained coverage as of May 1 under the ACA.We do not know yet exactly how many of these people were previously uninsured, but it seems certain that many were. Recent national surveys seem to confirm this presumption. The CBO projects that the law will decrease the number of uninsured people by 12 million this year and by 26 million by 2017. Early polling data from Gallup, RAND, and the Urban Institute indicate that the number of uninsured people may have already declined by 5 million to 9 million and that the proportion of U.S. adults lacking insurance has fallen from 18% in the third quarter of 2013 to 13.4% in May 2014.

On the one hand this appears to be a huge gain (though it depends on your perspective; see below). On the other hand, coverage of health insurance remains at 87% after the ACA (including so-called bronze plans); in comparison, China has 90% coverage of health insurance, and most of the rest of the OECD is up around 98-100%. It may not seem fair to compare America with countries as advanced in health financing as the Europeans, but consider this: Ghana has 65% coverage of its National Health Insurance Scheme, though private payments still make up 66% of total health expenditure, and Ghana is planning on gradually increasing this figure. I don’t mean to belittle Ghanaians by comparing them with a country as disfunctional as the USA, but given the relative wealth disparities it seems that the USA could do better than 87% coverage. Especially when you consider the political cost to the government of implementing this law.

On the topic of canceled policies, the NEJM can’t provide figures (the studies are not available), but it does point out that many of these policies would not have been canceled if the Republicans hadn’t stymied introduction of the law[1]. The grandfathering clause applied to policies extant when the law was signed in March 2010, but no one expected it to take 3.5 years to implement the law, and had it sailed smoothly through congress presumably most people would have been able to retain their (sub-standard) plans. The NEJM also points out that turnover in health insurance markets is huge, and in the absence of the ACA most of the people whose plans were canceled would likely have changed their plans anyway:

Health-policy expert Benjamin Sommers and colleagues point out that there was significant turnover in the individual market before the ACA went into effect: between 2008 and 2011, only 42% of people who started out with such coverage still had it after 1 year[2].

It’s also worth remembering that the reason these plans were forcibly canceled is that they didn’t meet minimum standards – and it’s worth bearing in mind that the ACA’s minimum standards would be considered reprehensible in any other OECD country. I have reported before on the NEJM’s findings about the poor performance of ACA-rated “bronze” plans, but the canceled policies were canceled because they didn’t live up to the standards of these highly flawed bronze plans. Complaining about having your insurance plan canceled even though it is basically an exercise in extortion seems counter-productive to me …

The other big issue for Obamacare is the risk pool. Obamacare included a “mandate,” a set of rules intended to punish young adults who did not sign on to health insurance before a certain date, with the intention of increasing the number of healthy people paying into the health insurance pools. This is done to ensure that people at low risk of illness are basically subsidizing the sick and elderly, a problem solved in other countries by simply providing financing for health through taxation. The big challenge of market-based systems is that young people won’t pay for insurance they don’t really need, but under a market-based system there is no way to make them. Obamacare is meant to close this loophole and the “moral hazard” associated with it, but it appears that it hasn’t been hugely successful. The NEJM reports that

enrollment among 18-to-34-year-olds surged as the March 31 deadline approached, climbing from 27% of total enrollment in February to 31% in the month of March. It is widely agreed that there is no single desired rate of young-adult participation. What really matters is whether the observed rate turns out to be consistent with the projections of insurance companies for any period — that is, whether the 31% participation is about what the companies expected for 2014. If young-adult participation fell short of expectations, this could prompt rate increases in 2015. However, even if participation in the pools skews to an older age than companies predicted, an analysis by the Kaiser Family Foundation showed that 2015 premiums might increase by only 1 to 2% to offset higher-than-expected costs. This modest projected effect of an older pool reflects the fact that under the law, health plans can still charge an older person a higher premium than a younger person.

This suggests (though not very clearly) that the mandate has served its purpose, but has only increased the proportion of total enrolment by young people by about 15%, and no one knows if this is enough[3]. I wouldn’t take this small increase as a sign of great success, and it suggests that in the future insurance premiums will rise, even though one goal of Obamacare was cost containment. It’s also worth noting that there is a large pool of young Americans with pre-existing conditions who were not previously eligible for health insurance (or not at reasonable prices) and some proportion of the increase under Obamacare is likely to be people with pre-existing conditions grabbing the chance to sign on[4]. These people are not going to lower the cost of insurance. But the ACA seems to have included a subtle get-out-of-jail clause for the insurers:

Carriers with higher-than-expected claims will receive reinsurance payments, for example. This factor alone reduced premiums by 10% in 2014 and will continue to play an important role in limiting premium increases in 2015.

So, the insurers are protected against the worst effects of signing up a bunch of sick people and failing to recruit young and healthy people. All these premiums, tax breaks, cross-subsidies and protections seem incredibly complicated, and it really does seem like it would be simpler just to introduce a single payer and let them slowly take over the health landscape. But that would be … anti-freedom, or something. Because reasons. So here we are …

… Which brings us to the question of the future of Obamacare. The NEJM is treating it as a fait-accompli, and is now beginning to publish articles on healthcare policy in the Obamacare world[5], though their articles seem to be predicated on the assumption that Obamacare is fundamentally flawed (they say “major ACA provisions don’t work”, which is surely medical-journal-speak for “you really screwed the pooch”), but they do seem to be accepting the new health financing landscape. My opinion is that the ACA is here to stay, and it seems to be surviving most of the legal challenges. This doesn’t surprise me, because it doesn’t seem to me that Americans have any stomach for genuinely radical (to them) healthcare reform, and it tells me that health policy makers in the USA – on both sides of the political spectrum – are going to have to accept the ACA as the new political landscape, and work within it to reform it rather than trying to overturn it, whether their goal is to overturn it for free-market or single-payer reasons. I don’t think the ACA will ever be as successful as more rational programs in other countries, but if reasonable politicians work within its framework they can continue to improve insurance coverage and, if they can make the cost containment elements work, they can probably improve quality of insurance too. Unfortunately the ACA is complex, works across multiple sectors of the private and public health system, and depends on a lot of goodwill, so it will be very easy for the Tea Party Tendency to undermine it from within government…

Fortunately, however, the ACA contains the key to its own success. If the NEJM is right, something like 20 million people have gained health insurance where previously they were either unable to pass the hurdles, or unable to afford it. That is 20 million potential Democrat voters at the next election, and I really don’t think one can underestimate the power of security in health care as a voting incentive. These people will be looking at a revolutionary change to their own lives, and the Republicans are going to campaign in the next election on a direct promise to revoke that revolution. On top of that, a lot of big American companies are desperate for healthcare financing reform, and the ACA has proven to those companies without a shadow of doubt that only one party in the US system is serious about delivering healthcare reform. This, plus the demographic slide slowly eating the Republicans, and their lack of talented presidential candidates, suggests to me that the next elections are going to be Democrat victories, and the ACA will be locked in as the health financing policy for the USA for the foreseeable future. In my opinion this is not the best outcome for Americans, but it is certainly a vast improvement on the past. Let’s hope the Tea Party and their apparatchiks in the popular media don’t wreck this chance for ordinary Americans to finally achieve security in healthcare, one of the fundamental goals of modern developed nations.


It appears more evidence is beginning to come in from government reports and independent surveys. The blog Lawyers, Guns and Money has a post suggesting that 60% of California’s uninsured have managed to get insurance through the ACA, and that the majority of these are through medicaid, which indicates they probably were uninsured due to financial problems rather than pre-existing conditions (there’s a link to Krugman in the blog, and also some kind of conspiracy theory screed on the Naked Capitalism blog). I also found (through the same bog) a vox article showing striking changes in Kentucky’s proportion of uninsured. The chart in that article is quite powerful, and apparently Kentucky had a functioning exchange from the beginning with an aggressive campaign to get people signed up. I wonder if voters in states that chose to reject the ACA’s medicaid provisions and exchanges might start to look askance at the priorities of their current legislatures …?

fn1: Well, it doesn’t quite say that … this is my straightforward interpretation of the language of the paragraph.

fn2: I should mention here that if you can’t read the original article due to a paywall, please don’t make the mistake of thinking that these statements aren’t referenced. I remove the references when I copy and paste text from the original article, because I can’t be bothered also copying and pasting the references.

fn3: It’s worth noting here that because most developed countries have universal health care systems based on taxation and national insurance, there are very few countries outside of America where research can be done on private insurance financing. So in addition to running a system that from the outside looks to be incredibly inefficient and low quality, the USA is also running a system that cannot benefit from the research outputs of the rest of the world.

fn4: The pre-existing condition issue has always seemed to me to be the easiest example of why the USA needs to change its system, and also the most obvious example of how inhumane and cruel the US system is. No one is responsible for their own genetics, but in the USA the market for healthcare is basically designed to exclude people with certain random background traits. That’s just mean.

fn5: For some reason they insist on calling it the “Affordable Care Act.” Weirdos.


This week’s New England Journal of Medicine reports on the relationship between coffee drinking and mortality in a cohort study of Americans. The study followed

229,119 men and 173,141 women in the National Institutes of Health–AARP Diet and Health Study who were 50 to 71 years of age at baseline

and this paper reports on their coffee drinking habits. Its main finding (my emphasis):

During 5,148,760 person-years of follow-up between 1995 and 2008, a total of 33,731 men and 18,784 women died. In age-adjusted models, the risk of death was increased among coffee drinkers. However, coffee drinkers were also more likely to smoke, and, after adjustment for tobacco-smoking status and other potential confounders, there was a significant inverse association between coffee consumption and mortality.

This is why we do confounder adjustment … so I can slurp down another black coffee in complete peace of mind. And check the details:

Adjusted hazard ratios for death among men who drank coffee as compared with those who did not were as follows: 0.99 (95% confidence interval [CI], 0.95 to 1.04) for drinking less than 1 cup per day, 0.94 (95% CI, 0.90 to 0.99) for 1 cup, 0.90 (95% CI, 0.86 to 0.93) for 2 or 3 cups, 0.88 (95% CI, 0.84 to 0.93) for 4 or 5 cups, and 0.90 (95% CI, 0.85 to 0.96) for 6 or more cups of coffee per day (P<0.001 for trend); the respective hazard ratios among women were 1.01 (95% CI, 0.96 to 1.07), 0.95 (95% CI, 0.90 to 1.01), 0.87 (95% CI, 0.83 to 0.92), 0.84 (95% CI, 0.79 to 0.90), and 0.85 (95% CI, 0.78 to 0.93) (P<0.001 for trend).

If we’re going on an American coffee standard, I’d say I’m drinking 6 or more cups of coffee per day, so I have a 10% reduced risk of mortality over 15 years (the rough period of the study). Sadly, though, I’m not protected against cancer:

Inverse associations were observed for deaths due to heart disease, respiratory disease, stroke, injuries and accidents, diabetes, and infections, but not for deaths due to cancer.

The effect was also observed in non-smokers (that’s me!)

So, the word is in from the world’s top medical journal: the more coffee you drink, the longer you live!

In my previous post on Obamacare commenter Paul has suggested I’m putting too much faith in government intervention to reduce inequality or contain costs. I’m about to go away for the weekend so don’t have much time to attend to my blog (nor may I next week, when classes start) but here’s a pair of questions that I think are related to that question, and to the (apparently still unsettled!) government vs. private debate. These two questions possibly also show how much we don’t know about health systems.

Did the NHS reduce health inequality?

One of the big claims of the NHS is that it reduced entrenched health inequality by giving poor people access to healthcare they were previously denied. I’ve implied before that I’m not confident the NHS has achieved that much in this regard, and pointed to the existing health inequalities in the UK as evidence of this. I’m loathe to say that it achieved nothing, but this fascinating and excellent paper from the British Medical Journal, published in the year 2000, suggests that despite the estabishment of the NHS, health inequality in Britain has persisted for 100 years. So is it the case that the huge intervention in the market that is the NHS achieved nothing in reducing inequality?

Does the US health system need political, not system reform?

It’s true that there’s very little evidence that private health markets reduce inequality or contain costs, but there are only two developed nations that have actually conducted this experiment (the US and Switzerland), and although the experiment is ongoing in many developing nations they don’t provide a good health policy laboratory (due to all the development issues and tropical diseases they are dealing with simultaneously). Switzerland, obviously, is a bit special, so there is really only one major economy that is actually trialling an even close-to-privatized system, and there’s a big problem with the experiment going on there: the USA is a plutocracy, not a democracy, and its capitalist system is pretty busted (see, e.g. “Too Big to Fail”), in the sense that it is heavily captured by special interests and the political system in which it is embedded is corrupt, unrepresentative and basically not democratic. Furthermore, the USA has a significant race problem that doesn’t exist in other places, is historically very specific to the USA, and creates a whole set of social problems that a place like Switzerland or Australia doesn’t have to cope with. So is it possible that a root-and-branch political reform, based on breaking the sectional interests in the US economy and the power of the super-rich to influence politics, would enable a purely private health system to function? If so, it’s unlikely that any attempts to salvage the market-based system that are based on regulation or minimal government intervention are going to work, because of the power of those sectional interests. Should proponents of market systems for health care be looking to developing nations for their examples?

I’m off to take an extended bath in the country! So comments won’t get much attention until next week …

My weekly TOC from the New England Journal of Medicine (NEJM) contains some interesting articles about cost containment in health care, including some discussion about what Obamacare might or might not do to contain costs, based on lessons from Massachusetts (RomneyCare?). Apparently the Affordable Care Act contains some quite innovative and also potentially punitive measures to force hospitals to reduce rates of readmission after discharge, but has missed some other opportunities in the mix. The NEJM has clearly moved on from debate about whether Obamacare is a good or bad thing, and debate about whether it’s going to be constitutionally viable, to discussion about how it will change the health industry. I wonder if this is going to make the NEJM (the world’s top medical journal) look stupid in about 6 months’ time…?

The first article in the NEJM contains a discussion of the problems facing the health system in Massachusetts, which famously introduced a version of Obamacare a few years ago. This system essentially forces people to take up a health insurance plan, penalizing those who don’t, on the assumption that such a model will improve equity and reduce costs through expanding the risk pool. Unfortunately, it appears that the plan hasn’t led to any serious levels of cost containment – according to the NEJM article, costs have risen significantly since 2006. The basic cost for a “bronze” package is $275 per month, which I’m pretty sure is significantly higher than my “silver” care package in Japan, and is $100 higher than it was just a year or two ago. The article claims that this is because of problems in the payment system in the Massachusetts system: it’s not the insurance plan per se, but the way in which hospitals are paid for providing services. Hospitals have been paid under a fee-for-service plan, and this encourages providers to charge for extra services and make extra money. Massachusetts is solving this problem in two ways: by moving to “global health payments” and by forcing people into “accountable care organizations” (ACOs). The former is a system of payment based on the expected total cost of a person’s illness, rather than the services provided within it, designed to penalize providers (i.e. hospitals) who fail to deliver the required care within the expected cost framework associated with any given disease. The latter are large organizations charged with taking responsibility for the care of a group of patients (similar, I think, to the NHS’s clinical care commissioning), and composed of large numbers of amalgamated insurance purchasers. Essentially, “global payments” are an attempt to exit from the fee-for-service system towards a payment system that discourages over-servicing, and ACOs are an attempt to merge small healthcare providers together to give them more negotiating power (as an example, all public employees are going to be combined in one ACO). These two reforms in tandem look suspiciously like an attempt to force the Massachusetts system towards something that looks like the NHS. There’s a hint here as to a basic fact – on the commissioner (health insurance) side, cost containment is best achieved by consolidating commissioners in order to achieve greater bargaining power with providers, and the maximal example of this is the government-run single-payer system. It appears that Obamacare is likely to have a lot in common with this system.

The next article describes Medicare’s attempts to reduce costs through reducing readmissions, and describes some initiatives in Obamacare to reduce readmissions in order to contain costs. Reducing readmissions is something of a holy grail in healthcare cost containment, because readmissions are a theoretically avoidable source of significant healthcare costs – you got your operation, left hospital but had to come back for some kind of medical complication, so you represent a hospital admission that can be prevented through hospital-focused quality control (rather than lifestyle change). Reducing these leads to reductions in overall costs, and better patient experience (no one wants to go to hospital). The article includes a fascinating discussion of what Obamacare aims to do to reduce readmissions – penalizing the worst offenders – but also discusses why for many hospitals reducing readmissions is not a viable financial goal:

Unless they are at maximum capacity, hospitals face two major economic disincentives to reducing readmissions for the specified diagnoses: the direct costs of the program itself and decreased revenues resulting from successful interventions. Interventions to create and sustain reductions in readmissions typically average $100 to $200 per discharge and often have spillover effects, decreasing hospitalizations for nontargeted diagnoses and reducing readmissions from any cause even outside the 30-day window and across payers. Although these effects are desirable outcomes for patients and payers, they detrimentally affect hospitals’ finances.

This is an interesting and often-overlooked aspect of the private healthcare market: it’s not in the interests of hospitals to reduce rates of illness, since they get paid by insurers to treat sick people. And for hospitals that don’t have outrageously high rates of treatment failure, a little bit of treatment failure is (financially) a good thing[1]. This kind of concept just does not apply in the publicly-run systems of the UK and Australia. The article goes on to introduce the concept of a “warranty” rather than a penalty, under which hospitals have to provide care for a condition at a given price and as part of that care have to offer a warranty – so readmission to hospital gains them no financial benefits, since they have to correct any post-surgical complications without extra payment. This forces hospitals to get it right the first time.

Unfortunately it’s not that simple. A third article in the NEJM challenges the idea that reducing readmissions is a worthy goal. It points out that, although numbers of readmissions may vary substantially, rates may not (and rates are what it’s all about in this business). Furthermore, there is evidence that readmissions, although apparently preventable, are often outside hospital control:

The growing body of evidence suggests that the primary drivers of variability in 30-day readmission rates are the composition of a hospital’s patient population and the resources of the community in which it is located — factors that are difficult for hospitals to change.

There is also evidence that readmission rates may increase when service improves, or that patients may be happier when readmission rates improve, because good quality continuity of care may identify additional health care needs:

whereas some studies have shown that sustained efforts can reduce readmission rates somewhat, others have shown that interventions aimed at improving care coordination and access to follow-up care actually increased the rate of readmissions, presumably because of improved access to needed care, with commensurate improvement in patient satisfaction

The authors of this article also point out that in focussing on readmissions the system privileges cost containment over quality of patient experience (i.e. productivity), which is a kind of cost containment in itself, though perhaps less quantifiable in a fee for service system:

over the past decade, we have seen very little improvement in patient safety, and although mortality rates have declined for a few conditions, they remain high for most others. Many of these deaths are preventable. Yet we are focusing tremendous resources on preventing rehospitalizations for three conditions that account for approximately 10% of all hospital admissions in the Medicare population.

They suggest that we should focus on patient safety, and if we’re going to focus on avoidable readmissions we should focus on very narrow time frames (3 or 7 days), the conclusion being that hospital readmissions are not where we are going to find our savings. I think this is another example of how “efficiency gains” never materialize in health – regardless of the health care system you are experiencing, when you hear politicians talk about “efficiency gains” you should think “oh! a wanker speaketh!” Especially if they talk about sacking back office staff (but a statistician would say that).

The thing I think is most fascinating about these three articles is what they imply about the state of knowledge of health care systems today. Despite 100 or so years of development in health insurance and health systems, modern health care theory is incapable of working out exactly what we want from healthcare. Even worse, modern healthcare markets are constructed without any real understanding of what kind of product we’re buying when we participate in them – we know we want “health” but we don’t know whether being readmitted to hospital is a good or bad thing, and people buying health care (insurance companies) and selling it (hospitals) not only can’t agree on a mechanism for setting prices, but the hospitals are profiting from selling (in some cases) a product no one wants to buy, but are forced to buy the hospitals’ own mistakes (hospital readmissions). What kind of private market works under these conditions? It’s not an information asymmetry, it’s an information fuck up. Also noteworthy is the gradual movement of the Massachusetts system towards a form of NHS-lite, in order to reduce costs. Is that telling us something?

The NEJM is holding a fascinating debate on health system performance and planning, within the (admittedly limited) context of the US system. As this debate plays out it gives the rest of the world a fascinating insight into how weak the theory underlying privatized markets for health care really is. It’s not that market systems are fundamentally right or wrong – it’s more that we haven’t worked out how to price health care, so price signals just don’t work. Can such a thing be done? And if so, would an entirely private market in health care work? All my posts to date claim that an entirely private market is a disaster and an impossibility – but is the problem not the notion of a private market per se, but that we don’t yet have a sophisticated enough understanding of health (and, conversely, of markets) to be able to construct such a thing in the first place?

fn1: obviously a lot of treatment failure gets you shut down and your managers charged with negligent homicide, so it’s a bad thing[2]

fn2: no one, however, is suggesting that hospital administration are maintaining such a balancing act. What they *are* doing is prioritizing what they consider to be more important issues, like quality of patient care (see article three).

Continuing my series of ideas to reform the NHS, for this post I will consider a minimalist reform that aims to increase private investment and spending in the health sector without significantly disrupting the current form of the NHS. Mindful of the problems of central planning for resource allocation in health, this reform idea will introduce some mechanisms to allow increased flexibility in the public sector. It’s worth noting though that the last two governments (Labour and Conservative) have attempted to introduce flexibility into the public system through fictional markets, competitive budgets and the like, but these methods haven’t worked. Part of the reason for this is simple institutional inertia – the NHS is huge and has a 60 year history and its own culture, that won’t change quickly – but part of it is also due to the political sensitivity of the health sector, and the inability of the NHS to separate simple, practical decisions on how best to run the system from the political sensitivities of its political masters.

The reform plan I’m describing here doesn’t necessarily depend on a shift to fee-for-service payments, but it is considerably easier to manage if this does happen, so I’m going to wave my magic bloggers wand and assume that this happened. I’m also going to leave out all discussion of minimal privatization within the public system (of things like pathology services) because they’re irrelevant to the central model, but they could certainly be included. We also won’t look at the primary care sector, which is a desperate pit of trouble that deserves its own post, though in this one we’ll set up some institutions that might serve as competition to the current moribund GP model.


This minimal reform model aims to achieve three key goals:

  • Increase private funding of the hospital sector without damaging the ability of the public sector to provide free, accessible care for all
  • Widen the range of service providers in the hospital sector (both public and private) to enable the sector as a whole to respond to health problems more flexibly than it does now
  • Make the public sector less vulnerable to political interference and more flexible

We will do this through allowing the establishment of private hospitals that provide care on a fee-for-service basis, having the government and private providers set up new, flexible specialist surgical centres and turning all hospitals into “Foundation Trusts” partially independent of the government, funded on a fixed and legislated basis (so free of political interference) and capable of responding flexibly to changes in the overall health market. The easiest way to do this is to introduce a fee-for-service funding system, but a system of contractual funding agreements wouldn’t necessarily hinder these reforms.

Increasing public hospital flexibility

One of Labour’s better ideas in this regard, transforming better performing hospitals into “Foundation Trusts” that were partially independent of the NHS with more financial flexibility, was a good one, though probably of limited effectiveness. I think now the Tories are extending this to all hospitals, so that on paper at least the hospitals are semi-independent of government and have more flexibility over their decisions. This model is supposed to enable the hospitals to make financial and governance decisions independently of political interference, potentially including contracting out some services to the private sector and reorganizing clinical services to be more efficient. I think they can be re-nationalized by the government if they fail to meet certain financial and healthcare standards, primarily to prevent market failure. The unfortunate side-effect of this re-nationalizability  is that the government can intervene where hospital decisions are politically inconvenient, but obviously this intervention is a significant political decision and carries its own political risks, so should reduce the inclination of governments to interfere in all but the very largest of decisions. The Tories have already introduced a system to Foundation Trusts to set up private wings, aimed initially at health tourism, as a way of making more money – a policy I said previously won’t work in isolation to solve the NHS’s problems. But if these hospitals are given this flexibility in conjunction with some additional government investment in new types of facilities, and the entrance of fully competitive private hospitals in a fee-for-service competition with public hospitals for extra money, then significant additional investment and structural reform can begin to take place.

Allowing hospitals to be flexible means allowing them to be able to close some services and expand others. Consider two hospitals, A and B, located relatively close to each other in a city like Manchester. Hospital A has a large hand surgery specialty clinic, incorporating a large number of surgeons, grand rounds, a research facility, extensive links with academia and a teaching role; Hospital B has a small orthopaedic clinic that occasionally attends to hand surgery in amongst its other functions. Almost certainly, Hospital A will have better surgical outcomes (less cock-ups) and much lower rates of readmission and corrective surgery; it’s also likely to have much better rehabilitation services and post-surgical management. It likely also provides each surgical service at a lower cost than Hospital B, due to economies of scale and efficiencies from its more experienced staff. So the logical decision is for Hospital B to close its hand surgery operations altogether, and simply send them all to Hospital A. If both hospitals are being paid the same fee for every surgical service, it’s likely that B is making a loss on these services while A is making a profit – potentially a large enough profit to pay the transport fees to the patients and/or a finder’s fee to Hospital B. In this case it’s rational to close them, unless there is some strong reason why patients can’t make it to A if they live near B (unlikely in the modern world, and especially unlikely if the local hospitals have the flexibility to arrange patient transport networks). Currently these kinds of closures and rationalizations are hard to achieve, because as soon as the local newspaper gets wind of the closure of a clinic (let alone a whole struggling hospital or wing!) they run a vocal campaign against the local member, and often get their way. But by converting all hospitals into robustly independent Foundation Trusts these decisions are removed from government interference to at least some extent.

Government investment in new types of facility

One type of simple reform that was introduced to me by a hospital performance director in the UK was of shared specialty rooms. The performance director told me that his hospital and a few neighbouring hospitals were all facing a problem getting in a certain type of specialist (cardiology, I think). For these specialists to be employed by a hospital, they typically need to have a mixture of surgical and consulting work – so they want to have a full-time work load structured around a mixture of non-surgical and surgical work. But my interlocutor’s hospital didn’t have sufficient demand to justify such a clinic full time, so their specialist was under-worked and overpaid – or they had to make a decision not to employ one. The neighbouring hospitals had the same problem, and they had a vision of setting up a shared specialist facility, funded by all the hospitals but set up either in one of them or central to all of them, in a new building. Unfortunately they didn’t have any ability to do this – as public hospitals they couldn’t invest in such a facility, and with no private entrants in the market they couldn’t do it. Thus they had to either go without a specialist, or waste money on a specialist, in this one discipline. Foundation Trusts with suitable powers would be able to get around this problem by consolidation, closure and mergers; there’s no reason why they couldn’t cooperate with each other for maximum benefit, since they aren’t actually competing per se. But another option for these trusts is to invest in a new facility, or to petition the government to fund the establishment of such a facility.

So, another part of the solution to the NHS’s current problems is the establishment of new types of facility, specialist centres serving multiple hospitals on specific disciplines. Another type of facility the NHS has been trialling is a type of private provider that takes up excess demand in high volume, low-risk surgery like cataract surgery. The government could fund the establishment of such centres to serve the needs of busy and overburdened Foundation Trusts, who could then close their own wards and theatres devoted to these specialties and focus on their core service areas. These smaller, clinical facilities would be somewhere between an outpatient centre, an inpatient facility, and a GP clinic, and would be quite easy to target at areas of need. For example in areas with a high burden of diabetes-related illness the government could set up a diabetes specialist clinic that provided GP services trained in diabetes specialties; minor surgical procedures related to diabetes; community nursing aimed at improving testing and dietary changes; and surgical facilities for handling common complaints related to diabetes (such as eye problems and possibly even some kinds of serious internal surgery). Then nearby hospitals would be free to give up some of these procedures, or handle only the most serious ones as part of their specialist services, referring all the minor stuff directly to the local facility.

In essence this means the government spending more money on the NHS, but doing so through investment in new facilities specifically aimed at enabling existing facilities to rationalize and become more efficient – this is a combination of capacity expansion and efficiency gains in a fairly easily identifiable package. Governments often talk about “efficiency gains” in the NHS as a magical cure for all the problems facing it, but these efficiency gains almost never materialize because they’re built around making existing staff work harder. In a system as resource-constrained as the NHS, putting your finger on a bulge in one part will just produce a lump somewhere else. A better idea is to invest in new facilities that will enable existing hospitals to cast off the things they don’t do well and focus on what they do do well.

These facilities could, however, be even more flexible – as could the Foundation Trusts themselves – if they were able to incorporate a private element of their funding. This is the third arm of the reform – to allow additional flexibility by allowing some private services on top of the existing structure of the NHS, either competing with it or topping it up.

Allowing private investment

There are two types of private investment that could be allowed into the NHS without significantly changing its remit. The first is to allow private hospitals to enter the market to compete with public hospitals on certain services, especially high-volume, low-risk services with long waiting times. The second is to allow full-fee-paying hospitals to take patients from the NHS and charge them directly. Both types of facility introduce private investment into the NHS, but for very different purposes.

The first of these exist now, and are used by the NHS to handle their waiting list problems. For some simple surgery (like cataract surgery) when someone’s waiting time for the surgery goes beyond 3 months, the NHS pays for them to be treated at a specially established private facility. These clinics typically handle things like cataract surgery that are in very high demand and easily handled. These clinics exist now, and could easily be allowed to expand and compete directly with NHS hospitals for all patients on a fee-for-service basis. If they can provide a better service than neighbouring hospitals, then those hospitals might be able to close their cataract surgery wards and focus on something else that they do better – or contract them out to the private facility, thus gaining income they can spend on other things. Foundation Trusts might even want to invest in setting up such facilities themselves, pooling the cost with neighbouring hospitals so that they can cast off their own high-demand services to a single specialist clinic. In such a case they might need to petition the government for support, but they could probably also just get investment from a private provider of some kind – not in a flawed private finance initiative, but in a straight out for-profit business plan. Because the Foundation Trusts are not for-profit services, any profit they make from this new service will be ploughed back into their own investment programs.

The second type of facility is more controversial, because it means splitting the NHS into a private-for-profit and a public section. The NHS could allow private health providers to establish new hospitals or facilities, that provide a range of services at a cost above the NHS tariff. Patients can choose to enter these hospitals instead of the NHS hospitals, but the NHS will only pay for the standard tariff portion of their service. The rest comes from their own pocket or from a health insurance program. Essentially, this allows private investment in the NHS, but prevents the private costs from blowing out so much that no one can afford the care. The advantage of this is that it relieves the physical pressure on the existing hospitals that leads to waiting times, enabling wealthier people to essentially jump the queue through private health insurance, but by allowing the NHS to pay some basic part of the service it extends this queue-jumping option beyond the realms of the super-rich, the only class of people who can currently afford private insurance covering full hospital care in the UK. Because people are already paying through their taxes for public care they won’t also pay for private insurance unless it is very cheap – and the best way to make it cheap is to make the costs it covers a top-up on the basic tariff, rather than the whole cost of hospital attendance. Of course the NHS could refuse to pay the whole tariff to private providers – so a private hospital patient receives, say, 80% of the NHS tariff and pays the rest plus the hospital’s additional private fee out of their own pocket.

It’s possible that Foundation Trusts would be the first organizations to establish such private facilities, so that they could take advantage of excess demand for certain common procedures and turn the money back into their own services. But it would also be possible for private companies to build these facilities. I imagine that this would take a long time and build up from very humble beginnings – a cataract surgery here, a hand clinic there – but over the long-term it would bring much needed funding into the system, as well as a small amount of private spending. Essentially it would enable the NHS to increase the volume of services it provides without a concomitant cost to the government. This partially tariff-subsidized model of private care is essentially what the Australian primary care system works on, and it seems to work well to both keep down costs and expand capacity – exactly what the NHS needs.

Effects on Inequality

The system described here wouldn’t fundamentally change the patient experience in any way, except to increase hospital choice, but it would lead to some mild increases in government costs – short term investment in small facilities and long term increases in services paid for. But it would lead to increased private funding and expenditure, and potentially the competition over services would enable the government to reduce the unit-cost of those services, leading to overall efficiency gains and long-term cost reductions. I think it would also have potential benefits in reducing inequality. For example, the diabetes clinic example would likely be implemented in areas of highest demand for diabetes services. In the UK, this demand is in primarily poor areas with large South Asian or black Caribbean minority populations, which suffer an unnecessarily high burden of diabetes illness. By establishing both government run and private facilities in these areas, and allowing neighbouring hospitals to consolidate and refocus services, it is likely that a significant health inequality problem in the UK could begin to be tackled, without necessarily incurring large cost burdens. By the same token, hospitals in poor areas suffering large waiting lists and underinvestment could close facilities that aren’t in demand but are being kept open for political reasons, or simply move services between hospitals so that they are run more efficiently, reducing waiting times and improving outcomes in these areas. The system remains largely publicy funded but more flexible, potentially enabling inequality to be reduced without introducing new inequalities through avoidable market failure.

The benefits of simplicity

The other major benefit of this reform idea is that it is achievable through gradual change, builds on existing structures, and can be done with minimal political risk. Whatever party introduces these reforms (and I think it is more likely Labour than the Tories that would do this) will be able to argue that it is building new hospitals and increasing investment, but that this comes with the cost of reorganizing existing clinical arrangements. This may be a risky sales task, but it’s a lot easier than “you’ll be better off once we’ve flogged the lot!” And the gradualism enables the government to experiment with the changes and adjust them as it sees problems arising. Nonetheless, many of the changes – especially ward closures and moving specialties – will be controversial, and until a government gets a strong majority and acts decisively, even change as minimal as this is unlikely to happen. Especially after the Tories stuff up their current plans and make anything with even the vaguest aroma of privatization off-limits for a generation. But I think this approach is the most likely to be successful in the UK, and is both achievable and capable of significantly improving the NHS.

The first suggested reform idea in my series of ideas to reform the NHS will start with this, the most radical. This reform plan presents a way to raise a large amount of money to pay down government debt, expand private and public investment in the health system, make the health system more flexible and accessible, and directly tie hospital funding to health outcomes, without changing the annual cost structure of the NHS at all. It sounds too good to be true, and so it probably is.

As I observed in my post on the current Conservative privatization drive, lack of private providers in the UK health market and central planning of all services are significant problems with the system: they affect the quantity of investment available, the efficiency of investment, independence of investment from political goals, and flexibility of response to changes in health care demand. The simplest approach to this is to allow new private entrants into the market and to fund them just as if they were public hospitals. This is very hard to do under the current system, because current block funding methods don’t work well for contracts with the private sector, and it will take a long time for new hospitals to be approved and built. A faster, simpler approach is to shift all the hospitals in the UK to a fee-for-service payment system (like Medicare in the USA) and then privatize them.

Shifting to a fee-for-service system

Fee for service systems have disadvantages that are well understood, but one significant advantage they offer is flexibility in response to demand. They also make the insurer paying for service able to purchase services from any provider, rather than having to be locked into contracts with specific providers – this potentially allows prices to be at least partially set by market forces. The main disadvantage in a stable health system is that they encourage over-provision of services, which leads to rapid cost growth for the payment provider (in this case, the government) and excessive healthcare attendances for patients – something that is potentially fatal in the case of e.g. prostate cancer. However, despite their disadvantages some systems – such as Japan – that use them have still managed to get good healthcare outcomes with low cost, so they aren’t the end of the world. Shifting a system like the NHS to such a payment process shouldn’t be impossible – in fact they’re already starting to do this in some ways using Healthcare Resource Groups. So let’s assume that this can be done, and all public hospitals can be switched to receiving payment on the basis of a fee-for-service system. Prices are set by the government, and hospitals paid for providing services. In theory there is no service the government won’t fund at a specified rate (we’ll return to this below), so everyone will get treatment. Some hospitals will provide some services at a cost below the price set by the government, so will profit from these; other services they provide at costs above the rate will either be subsidized by the more efficient ones (if the hospital is a not-for-profit) or closed (if the hospital is a private company). We’ll see the latter risk is one of the big problems with a fee-for-service system, but we’ll cross that bridge when we’ve burnt it.

So the essence of this scheme is to shift to a fee-for-service system and then sell off all 200 hospitals in the UK.

Privatizing all the hospitals in the NHS

We want a rapid influx of investment in the NHS, and we want to free up the NHS itself from investing in hospitals, and shift it to being purely a purchaser of services. The fastest and simplest way to do this is to simply flog off all the hospitals. This would potentially raise an enormous amount of money for the NHS very rapidly. The total cost of hospital care every year is about 20billion pounds, I think, spread over about 200 hospitals; that’s 100 million pounds per hospital on average. I think a private company that could be guaranteed an approximate 100 million pound income stream with, say, 10 million pounds a year profit would be willing to invest probably 100 million pounds in a hospital, so flogging off all 200 hospitals would raise about 20 billion pounds. This would be enough money to pay down about 10% of government debt and have 10 billion left over, which I propose be put into a health future fund. This future fund contributes to healthcare research and funding of new investments through its profits, and uses the principal to provide investment loans to the private and public organizations involved in the healthcare market (so that, e.g., if a union decided to buy a hospital for 100 million pounds it would be able to get a loan from the healthcare future fund to do this). This fund would thus support continuing investment in healthcare, and provide grants for research into new treatments as well as emergency funding to save struggling hospitals in the immediate aftermath of the privatization[1].

These privatized hospitals are then paid for their services from the existing NHS budget, which is about 20 billion pounds a year. But where previously this 20 billion pounds a year was split between hospital services and capital investment, now it is devoted only to services. I think this is the equivalent of increasing the hospital services budget by probably 5 or 10% (the amount of the existing budget that was being diverted by the hospitals to investment). Additionally, we have a huge short-term private investment of as much as 10 billion (the maximum value of the loans from the future fund) and then any other investment that the private owners want to put in. Having purchased a 100 million pound a year operation for, say, 100 million pounds, they might be willing to invest a bit more in improvements, I’m guessing.

Even if my numbers of hospitals and total hospital sector budget are incorrect, it should be clear that the privatization would raise a lot of money that, if disbursed between debt repayment and setting up a healthcare future fund, would be of significant benefit to the UK economy and health economy.

Allowing new entrants into the system

Of course subsequent to this privatization the government could also allow new entrants to the system, that would probably set up specialist services in areas where specific services were lacking. These entrants would be able to get start up funding from the future fund, of course, and would be entirely private investment. Thus over time the size of total investment in the health system would grow, and important consideration in improving levels of care in the UK.

A further, more radical entrant into the system could also be allowed: hospitals that charge an upfront payment. These hospitals would be additional to the current complement of hospitals, but would be able to charge fees to their admitted patients in addition to the standard service. They would, essentially, be luxury care centres. Unlike the current system, though, which does not allow the NHS to fund these kinds of providers, the hospitals would be allowed to charge the basic service to the NHS, and then charge only the top-up payment to the patient. Patients could pay out of pocket or cover the co-payment from a private insurance fund. This would allow private insurers to begin covering healthcare in the UK market, expanding the amount of per-service funding (and thus the proportion of GDP devoted to healthcare financing), but without requiring the private fund to cover the whole cost of hospitalization. Funds that have to cover the whole cost of privatization – as happens in America – have to be prohibitively expensive, and will not be able to compete in the British market.

These private entrants would have to be additional to the current complement of hospitals, and clearly labeled as private hospitals. They would need permission from the government to be established, and would only be allowable in areas that have already got a decent supply of healthcare. This is necessary in order to ensure that people don’t have to travel too far to get free care (a fundamental constraint on the NHS). As a result they would be unlikely to ever form a major component of the UK hospital system.

Consolidation and closure of existing services

After privatization, I expect many hospital owners would look at the cost structure and efficiency of their new purchases and decide to shut down some services because they can’t provide them competitively. For example, if a hospital in East London is providing cardiac services it is unlikely to be able to compete with Bethnal Green, and would probably close or restructure those services in order to remain profitable. Over time this would lead to a reallocation and consolidation of specialist services into better, more efficient hospitals, leading to efficiency gains and cost minimization, as well as improved health outcomes. This is very hard to do in the NHS as it is constructed now due to political influence. There is a risk that in the short term at least – until new hospitals are built or capacity is otherwise expanded – that this would lead to a loss of overall service levels, so it would be necessary to require hospital owners to seek permission for closures in the first, say, 5 years of their ownership. It might be necessary for the government to fast-track establishment of new hospitals in order to overcome this problem, which leads us to the possibility that some hospitals would remain in public ownership.

Partial privatization and gradual change

It’s probably best if the biggest and most important teaching hospitals remain in public ownership, so that the government retains some direct power to intervene in the provision of health services and also in the teaching and research capacity of the hospital system. This could include using the proceeds of privatization to build new hospitals, probably specialist, providing specific services in some areas of the country. These hospitals would be funded under the same arrangements as the privatized hospitals, though obviously they would also need some form of block grants in order to support investment and to maintain loss-making specialties that the government believes they need to run for research or market-failure reasons. They wouldn’t be precluded from opening private wings (in fact, their reputation for excellence might make them the best option for starting this process), but they would probably also be held to stricter rules on service provision (for reasons of access and equality) than the private providers.

As a general rule, rapid privatization is a dangerous prospect so the model proposed here might require a long time to complete, perhaps starting with smaller hospitals and building on their experience. Reform of the general practice system to allow private companies to enter their too would probably also be necessary, in order to prevent the primary care system putting a brake on the development of the tertiary system. Gradual privatization would mean that when the really big services were privatized there was less risk of mistake; it would probably also increase the amount of money gained, since flogging off all the hospitals at once would probably require selling them at bargain basement prices. This would also allow the system to be expanded as the privatization happened, convincing the public of the benefits of the process as they see new services open and waiting times drop.

Risks and disadvantages

The worst risk in this system is that immediately after privatization the new owners will close unprofitable specialties without opening new ones, leading to a general reduction in services provided across the NHS. This would indicate either that the NHS was over-stretched and incapable of providing many of the services it was providing, because the prices set on privatization would have been based partially on pre-privatization activity, and may have been set too low if the NHS had been operating massively under-budget for years. There’s also the associated risk that with prices set too low, the new owners struggle to make a profit, go into administration and then have to be re-nationalized. That would be a political disaster of monumental proportions, as well as costing the government a huge amount.

Another possibility is that the closure and reallocation of services will see a massive loss of service provision in poor areas, where profits will be lower. This will increase the inequalities already inherent in the British system and is one of the main concerns of the advocates of retaining central planning in the NHS. Careful choice of which hospitals to privatize will help with this, as will the simple expedient of providing additional funding in some form (block grants, contractual rewards, or special loans) to companies that retain services in these areas. If this risk does eventuate, the government may find itself having to increase the total healthcare budget to support its goals of reducing inequality – but this is likely to be the case in any healthcare system in the UK that is serious about reducing inequality, and although politically unpalatable in the UK it’s essential if the UK ever wants to reduce inequality. Sadly, this is never going to happen (and if it does the money will be misspent anyway).

The final disadvantage of this plan is that it requires the government of the UK – which couldn’t organize a root in a brothel – to manage the biggest privatization of services since the collapse of the USSR, to set a realistic and practical pricing structure for healthcare that is affordable but sufficient to enable private sector organizations to make a profit, to not to squander the result of privatization, to be willing to commit to a 5, 10 or even 15-year long period of massive health system reform (this would require bipartisan support, which is almost impossible in the toxic political environment of the UK) and to be able to sell the whole thing across multiple elections. So to actually implement this program in the UK would be inviting disaster.

The Final Picture

If successful, the final health system that emerged from this reform would very much resemble that of Japan, with an entirely public purchaser of services (the NHS) purchasing services from a largely private market place of hospitals and clinics. Prices would be set by the government at first but could potentially be set purely by market forces in the long term as capacity increased. Because the UK system is more centralized in larger hospitals than Japan, and because our remit requires all patients to be able to get any service free at the point of care, the system would probably have more publicly run providers (primarily large teaching hospitals) than in Japan, and would probably still be slightly more shambolic (due to the lack of private payments). The healthcare future fund would be unique to the UK, and there would probably be a large number of direct grants and subsidies (at least in the short term) to maintain the system and prevent growth of inequality. The final outcome of this process is not unrecognizable in the current range of healthcare systems, though, so it’s not impossible to imagine that a well-run privatization and reform program could get the NHS to this point. And if it worked broadly similarly to the Japanese system, it would be a vast improvement on what the UK has now.

fn1: I think this would be necessary because even a mind as great as mine would be likely to make mistakes in pricing services or estimating long term service levels

Having criticized the approach the UK government is taking to reforming the NHS, it seems only fair that I should make a few suggestions of my own. Unburdened as I am by the responsibility to be serious or to come up with a proposal that actually works, I’m going to write up a few perhaps crazy suggestions this week and next. For my reform ideas, I’ve decided to set the following arbitrary constraints:

  • The basic remit of the NHS must not change: that is, any reform plan must preserve the ability of the NHS to provide quality care accessible to all and free at the point of delivery
  • The patient experience must not be changed, so that if a reform plan were enacted wholesale today, a patient attempting to use the health system tomorrow would not notice any practical effect on their lives or patient experience[1]
  • As much as possible, red tape and administrative barriers to healthcare access should be reduced at the level of the patient, so e.g. we should try to abolish lists and restrictions on hospital attendance
  • The system should allow cost containment
  • Where possible, the system should reduce inequality, or at least not make the current system worse

I will of course add extra rules wherever possible.

The four ideas I have so far are:

  • Radical privatization, which looks too good to be true and probably is (this is essentially a radical shift to a Japanese-style marketplace but with no private up-front payments)
  • Minimal privatization, in which minor changes are made to the hospital system to allow new entrants and private investment (essentially the Australian model hospital system tacked onto the British GP system)
  • A license system, with trade in licenses slowly opened up to allow increased privatization and resource reallocation (this is completely new but probably just a mechanism to achieve a mixture of the other three ideas)
  • Reform of the GP market only, to significantly improve the function of the primary care system while leaving the tertiary care system unchanged (essentially, the Australian model)

I hope these ideas will show that it’s possible to radically change the structure of the NHS without changing its essential relationship between patient and system, its fundamental funding arrangements or its main outcomes. I don’t claim that any of my ideas will work, of course, nor do they have to since I’m writing on a blog. But I suspect that even the most minimalist of them would be politically unpalatable in the UK now (and even more so when the Tories stuff up their current round of reforms).

Any other ideas in comments would be appreciated, and I’ll try and write them up too!


fn1: This rules out care budgets and vouchers and some of the crazier ideas floating around in the UK and USA, that require patients to become active participants in health service planning