Questions in The Observer we can answer

How can £20bn cash cuts and increased marketisation lead to a better NHS?

1) Markets (note, not capitalism, markets) promote innovation better than centrally planned or run systems.

2) Innovation leads to increases in total factor productivity.

3) Increases in tfp are synonymous with (as in, this is the definition of tfp) being able to do more with the same resources, being able to do the same with fewer resources.

A market driven health care service (note please, not a capitalist one) will be more efficient over time than a not-market driven health care service.

That\’s how.

24 thoughts on “Questions in The Observer we can answer”

  1. But “markets” is identical to “evil profit making bastards”. We must maintain the bevanite purity of the NHS dream, regardless of cost, efficiency or patient welfare considerations.

    True believers, again.

  2. These are just unsupported assertions like the UE guy said yesterday and Mankiw’s students complained about.
    The property market is the biggest and most influential with millions of independent participants but all they do is make sure the political parties keep house prices up .No innovation there, nor ever will be .

  3. They are unsupported assertions HERE, because some things are so well known, they are not supported every time they are asserted.

    People don’t go round supporting assertions such as as the price of X goes up, demand for X goes down, or the sum of the squares of the adjacent and the opposite is the same as the square of the hypotenuse because if we had to support every single assertion we made every time we made it, we’de never get anything done. Its only worth supporting contentious, or established assertions.

    The assertions 1-3) above are not contentious and are agreed by all but boneheads.

  4. “price of X goes up, demand for X goes down”

    This is contentious. It’s certainly not on a par with trigonometry, and also not what is observed in loads of markets globally every day.

  5. DBC Reed,

    The property market is the biggest and most influential with millions of independent participants but all they do is make sure the political parties keep house prices up

    Land’s a base natural resource. You might as well say that there’s been no market improvement in the amount of oxygen atoms that we have available. Health isn’t like that. It’s a value-added service.

    Friend of mine did some consultancy work for the NHS – analysing how to maximise the use of visiting nurses time. Some of the things he found were just bleedin’ obvious. Things like dividing up the area into sectors, so that nurses were allocated appointments near each other, rather than driving across a large town, giving nurses £150 GPS devices so that they could find appointments, and trying to match work to nurses so that senior nurses weren’t allocated to appointments that more junior nurses could do.

  6. I don’t think Chris took the time to express the point in the necessary detail – there is an equilibrium point for price / demand. As well as movements in the equilibrium point, based on changes to price or demand, which generally follow the rule, there will be shocks (rational or irrational) away from the equilibrium point.

    People may hoard or speculate (I’m not sure if there is a fundamental difference here) if they see prices rising, which will drive prices up. And some goods are less substitutable than others.

    And, anyway, it is the exceptions that are interesting. The Giffen and Veblen goods, signalling and sacrifice effects …

  7. @ SE 1
    The bevanite purity was unknown to Nye Bevan who, allegedly, quoted Kipling when, faced by opposition from the Royal College of Surgeons, “he stuffed their mouths with gold”.

  8. Just because it has never existed and is an invention of the “golden age” tradition of historical narrative doesn’t prevent it from becoming a cultural shibboleth and, for some, even a point of irreducible principle.

    I’m surprised A&E Nurse hasn’t been on yet to tell us that the NHS is fundamentally different not just from every other health system on the planet but from every organisation that has ever existed and that any changes, however minor, will destroy it completely.

  9. SE – quite!

    I still find it amazing that it is easier to book a hotel room on the other side of the planet than it is to make an appointment with an NHS consultant.

  10. I’m surprised A&E Nurse hasn’t been on yet

    I can’t speak for A&E Charge Nurse, but given that Tim has frequently cited the flawed Cooper paper on competition*, I’m not sure I can be arrsed… Besides, platitudes about the “market” have long been used as disingenuous cover for Lansley’s crackpot reforms (which read more like a medico-insurance industry shopping list), and the proof of the pudding will be in the eating. Frankly, I suspect it will be an utter clusterfcuk.** It’s all very well quoting soundbite assertions and the sad history of planned economies – but it might start to look a bit flat as acute care becomes evermore fragmented, and the only people doing well are the shareholders of Circle and agency nurses (for they will be in demand – Peace be Upon Them).

    I can’t stay and argue -I’ve had a bludy busy shift, and I’m going home to finish reading
    The Complete Western Stories of Elmore Leonard. Have a nice evening.


    **especially given that the big ol’ yardsale will do nothing to address the challenges of Elderly Care (as the select committee has observed).

    *** and for good measure:

  11. The article talks about a better NHS, and Tim is interpreting that as more efficient NHS. See the problem?

    A whole lot of squealing on the meeja today. Can you say producer capture?

  12. Tim’s original post is interesting because it raises two points: a) whether rates of innovation vary across different economic/political systems; and b) whether a “free market” is synonymous with “capitalism.”

    With regard to the first, there is a view that rates of innovation have actually been in decline since the 1870s. See Jonathan Huebner’s 2005 paper. Given that an extensive public sector did not exist in most Western economies till the 40s/50s, this would imply that something else was at work before then.

    A libertarian explanation of this is provided by Tyler Cowen in his book The Great Stagnation. A key point he makes is that during the era of neoliberalism, there has actually be a noticeable deceleration in innovation. This same point is made from the left by economists like Ha-Joon-Chang (“the washing machine has changed society more than the Internet”).

    I think there may be some methodological issues with Huebner’s analysis, but the general premise, that innovation rates are influenced by more fundamental forces than workplace organisation, is worth considering.

    My own experience (in the private sector) is that innovation is largely a cultural issue, i.e. it depends on individuals establishing an environment that promotes and values innovation. This means it is fundamentally a factor of the quality of management. It may be that this happens less in the public sector, but that would be a criticism of that sector’s management calibre, which may be down to low status (they don’t attract the best) as much as a tendency to provide a home for the mediocre.

    This doesn’t explain the historical trend, particularly when you consider the increased investment in management as a taught discipline (or maybe that is the problem).

    The second point, that capitalism and free markets are not the same thing, is one that doesn’t receive enough attention.

    There was an amusing illustration of this on Newsnight last Thursday when Jermey Paxman asked, in so many words, why can’t we envisage an alternative to capitalism?

    The answer is that we have a paradigm and we can’t easily see round the edges. Julie Meyer made this explicit by stating that capitalism is free markets.

    Tristam Hunt (bear with me) attempted to put capitalism in a historical context but made the tactical error of mentioning Marx, which led to a 3-vs-1 monstering about the moral failings of Eric Hobsbawm and the wonders of Brent Cross shopping centre. He should have directly challenged her premise.

  13. There was an amusing illustration of this on Newsnight last Thursday when Jermey Paxman asked, in so many words, why can’t we envisage an alternative to capitalism?

    I think this says more about Paxman than anything else. There are already alternatives to capitalism, the two best examples I can think of being the American engineering and construction companies Bechtel and CH2MHill. The former is family owned, the latter some sort of mutual cooperative, both are probably the largest companies of their kind in the world, certainly the US.

    There are probably many reasons why this sort of ownership structure is not more common than the publicly listed company, most of them being practical, and I doubt it would take much Googling to find out. That Paxman thinks he’s asking a profound question here says a lot about what passes for intelligence in the BBC these days.

  14. Note how the Guardian equates efficiency savings with cash cuts. Cash going to the NHS is not being reduced. The NHS is being asked to get 20% more productivity with increased cash.

    Those who think that “marketisation” is the solution are giving the easy answer. It will probably drive out many inefficiencies but there are many more steps that can be be taken to improve productivity in the NHS and those who know what they are working in the NHS, but usually unwilling to undermine their own security.

    The main drivers of efficiency savings will be:

    1) reduction in secondary care and increase in primary care
    2) improved clinical technology
    3) getting a grip on “grade inflation”
    4) greater efficiencies in use of agency staff, particularly specialised nursing

  15. Ah, but can you have markets without price information?

    One of the reasons why I am less than sanguine about Lansley’s reforms is that all of this talk about markets ignores the fact that we don’t know real price information in healthcare – because it’s so friggin complicated. Introducing “competition” in such an environment is quite dangerous.

    Say that a hospital is doing 2,000 hip replacements a year. Of these 1,000 are easy and 1,000 are difficult. The price for doing hip replacements is set at 1000 pounds a pop. The easy ones cost 500 pounds to do and the difficult ones cost 1,500 pounds, because there is a need to pay for an ICU unit and sundry other costs.

    A private company comes along and says that they will do hip replacement at 1000 pounds a pop. Two potential problems:

    1) They cherry pick all the easy cases, making “profits” of 500 pounds, leaving the NHS with the difficult clients, who will then cost 500 pounds to the hapless trust
    2) They cannot cherry pick, but they do not pay for the acute care. Say, they get 50% good and 50% bad patients. Say they make no money on the bad patients, but still profit from the good ones. This then means that the NHS hospital loses income from the good patients and gets the full burden of ICU care.

    In reality the interlinks are very complex and the way that the NHS internally prices stuff isn’t up to snuff – you only have to think about cancelled operations at fiscal year end – yet you know that they have to have the operating theatres, they must pay the doctors and nurses, so they must be trying to save money on bandages and stitches!

    You can do things to improve the NHS and the market might help in places, but I’m not convinced that Lansley plan is going to be particularly good.

    One idea would be to allow an entire NHS trust to be run by a private sector provider. This would at least remove cherry picking/cost shifting. However, payment based on results inevitably leads to targets which can then be gamed.

  16. Ken

    So if the market company does the easy jobs, leaving the hard ones for the public surgeons, where does the average come out? Could we not be reducing costs this way? And you kinow fuill well that it does not average at 50:50

  17. diogenes

    Erm, the difficulty is that we don’t really know. At the moment there is an internal price (kind of) which is used to allocate resources to different areas and which is also used to support all necessary functions (ICU in my example, but also including training and necessary scale). If you allow a private firm to cherry pick the “easy” cases, unless you can accurately “price” the operations and support functions, there are no savings. Indeed, you can imagine a situation where the private firm offers to do the easy operations at a discounted price of 800 pounds, and they only make a profit of 300 pounds, and the NHS saves 200 pounds on those it has contracted out, but the profits from the cherry picked operations still undermines the NHS.

    There are some obvious and easy ways that we could save money (and spend some) – regional pay being one. But the attempts to bring in private contractors to do operations under Labour didnt go well – 1) They frequently failed to reach target levels of operations 2) There is some evidence that private providers treated less complex patients (but reimbursement rates were the same)

    But see below for a counter view. The view here is that private provision was still for easier ops, but outcomes were at least as good.

    This report suggests that separating emergency care from elective surgery might help with planning, but leaves open the question of necessary support services and training, in cost terms, scale of operations* and the need for easier ops to allow junior doctors to train. It’s a highly complex set of questions and I’m not convinced that sufficient attention has been paid to these questions.

    * A major problem – hospitals need to do lots of operations so that there is sufficient cover and so that junior doctors can be trained. Bad things can happen when you have small departments as noted in all the paediatric heart surgery scandals.

  18. I’d second ukliberty on that question.

    Seems to work OK in the private sector. “Easy” clutch repairs on bog standard family hatchbacks are the province of Mr Clutch where production line techniques & stiff competition cut the price to an affordable minimum. Tricky repairs on Ferraris & vintage Morris Oxfords go to a specialist who charges more for a specialist service. Just because the specialist presents a big bill doesn’t mean that the cost of replacing clutches across the entire motor industry isn’t vastly reduced.
    The counterargument seems to be, if you can’t make savings in one area, making savings in another is somehow immoral.

  19. Hey, let’s go with the ‘moral’ theme for a moment because that may be the crux of the matter…

    Out in the world of free enterprise we’re all used to making least worst judgements of outcomes. In the health service establishment, a less than ideal outcome is somehow ‘immoral’. So production lining hip replacements resulting in a few difficult cases having less than perfect attention is unacceptable. But that is only looking at the actual operations performed. It completely ignores the hip replacements that aren’t done because there isn’t capacity. The folk who totter to their graves in pain because their waiting time for the Grim Reaper expires before their waiting time for the op. The agonising years waiting for the op they do get & the lost years of mobility enjoyed. Because they’ve not come under the surgeon’s knife they’re somehow outside the moral framework.
    Strange way of looking at things.

  20. ukliberty

    Read my earlier post. The problem is that the NHS doesnt have proper price information, so the easier operations are working to cross-subsidise more complex operations or other costs (training, ICU, etc), so the NHS in my example appears to save money on an accounting basis (£1000 cost per op, private company price £800) but this ignores the fact that the £300 of profit for the private company was actually the cost of ICU and other support costs, which leaves the NHS out of pocket. Even assuming that you could correctly identify the difficulty of each operation and the “cost” to the NHS, it stil leaves the problems associated with teaching and scale. You’d need to completely redesign the way the NHS operates. A mammoth task and one that appears not to have been considered in sufficient depth.

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