Feature

Working for nobody

With the NHS reforms now five years old, James Munro measures the promises of the reformers against the reality of the results. Are they really ‘working for patients’?

In 1989, then health secretary Kenneth Clark launched the white paper Working for patients, calling it ‘the most formidable programme of reform in the history of the National Health Service’. Today, with five years experience of reform to look back on, it is easy to agree that it has been formidable. But has it been successful?

Of course, the criteria by which success might be judged are themselves contentious — but it is possible to attempt some judgement of whether the reformers succeeded in their own terms; that is, in promoting competition, increasing efficiency and extending patient choice.

Managing the market: competition or regulation?

The reforms were intended to secure increased efficiency through competition between providers in a market in which, as in any high street, prices are published and are visible to all players in the system. The picture painted in 1989 was of a market in which purchasers — health authorities and fundholders alike — would ‘shop around’ for the cheapest, quickest or best quality care.

But in reality the NHS internal market has none of the characteristics of a retail market, and stubbornly refuses to behave like one.¹ It has much more in common with an ‘industrial market’, in which there are few purchasers and providers, the product is complex and infinitely variable and providers carry a high proportion of fixed costs. The result is that packages of care — and prices — are negotiated privately between purchasers and providers, and relationships are likely to be long term. In itself this is not necessarily harmful to the efficiency of the market, but the lack of fixed and observable prices irritates the market regulator, the Department of Health.

It would be difficult enough if it really were a competitive market. But at the same time as establishing radical new structures intended to encourage competitive behaviour, the NHS management executive drew the lines of regulation and monitoring so tightly that no real competition has been allowed to emerge. Of course, in very many parts of the country competition was always wholly unrealistic because providers, especially community services, are effectively local monopolies. Yet even in London and other large cities which might actually be able to support a competitive provider market, regulation has been as tight — or tighter — than anywhere else. The NHSE has constantly intervened to impose or refuse mergers between providers, to prevent health authorities from moving their contracts away from under-performing hospitals which might become non-viable as a result, to regulate capital borrowing by trusts and to disallow cross-subsidies between services within the same provider.

The picture of ‘managed competition’ which emerges is one in which the management heavily outweighs the competition. While the Department of Health continues to talk in terms of ‘the process of devolution stimulated by the NHS reforms’, the reality is that political and managerial power in the health service have become more centralised. This trend will undoubtedly be consolidated by the transformation of the former regional health authorities into arms of the Department of Health. Indeed, one political commentator described the outcome of the reforms as a ‘neo-nationalisation’.²

Financial costs of the market

In the reform bill which went before Parliament in 1989, the government estimated the overhead required to operate the internal market at £217m per year. This sum was to cover an increase in management at all levels (£155m), payments to health authority members (£10.5m), administration of the fundholding scheme (£15.6m) and new information technology (£3.3m).

The real costs of establishing the reforms are difficult to estimate, but are certainly much higher. Even the official figures are well in excess of the initial estimates: £79m in 1989-90, £306m in 1990-91, £383m in 1991-92.³

What of the costs of associated with the day-to-day operation of any marketplace — the transaction costs? Unfortunately, there is little information available, and what there is relates mainly to the costs of fundholding rather than health authority contracting.

While health authorities have dealt mainly in block contracts, it is likely that transaction costs will not have gone far beyond that which would have been spent in traditional planning mode, though if contract negotiations increase in specificity and in number, then costs will rise accordingly. Extra-contractual referrals — which result when a patient is referred to provider with whom the health authority does not already have a contract — may pose a more significant cost to purchasers. Even after three years experience of dealing with ECRs, one commissioning manager estimated that ECRs were costing the NHS in her district almost £0.3m annually simply for the administrative processes necessary.⁴ She predicted that the problem must inevitably worsen.

A number of estimates have been made of the additional administrative costs incurred by fundholding. For example, a survey carried out by Fundholding magazine suggested that the annual cost of managing fundholding might reach £80,000 per practice, and even a riposte by two fundholders conceded a figure of around £60,000 was realistic.⁵

It is clear that the transaction costs of fundholding are considerably higher than those of health authority commissioning. One estimate is that management costs are about 6 per cent of an average fundholder’s practice budget contrasting with about 1.7 per cent for a health authority.⁵ If the total number of fundholders increases and the services covered by the fund are extended, then inevitably such costs will become a significant charge on the overall NHS budget.

Predictably, the information and accounting tasks associated with the introduction of a market have resulted in an enormous increase in the number of health service managers and administrative and clerical staff. Between 1988 and 1993 the number of general and senior managers rose from 1,240 to 20,010. Public concern prompted repeated protestations from ministers that much of the increase could be explained in terms of the reclassification of nursing and administrative posts as managerial ones. Nonetheless, there is no denying that a large proportion of the increase is a genuine expansion in managerial numbers, estimated by one analyst as an additional 1,700 managers over the period 1991-94.⁶

All of these additional costs which result from the creation of the internal market pose an important, and as yet unanswered, challenge to the claim that the reforms have secured ‘best value for money’. It is certainly possible that the old, bureaucratic way of doing things was, in fact, more efficient after all.

Increased NHS efficiency?

What evidence do we have that the efficiency of the NHS has improved as a result of the reforms? NHS activity increased remarkably during the 1980s, a period during which economic theorists would have us believe that no incentives existed to improve performance. For example, the average length of stay for acute medicine fell 29 per cent, and for acute surgery 13 per cent. The average cost per inpatient stay fell, in real terms, by 10 per cent. Hospitals treated 16 per cent more inpatients, 19 per cent more emergency cases and carried out 73 per cent more day surgery in 1989 than in 1980.⁷

These gains were achieved under the old regime of bureaucracy, without a market in sight. So did the reformed NHS do even better? Predictably, before the first year of the internal market had ended the NHS Management Executive had claimed ‘even better value for money’ as a result of the restructuring, but a detailed critique of the statistics concluded that the data ‘fail to support Duncan Nichol’s claim that the changes... are leading to... better value for money’.⁸

Many of the subsequent claims made in the stream of press releases and annual reports which have issued from the Department of Health and the NHS Executive have again been comprehensively refuted by academic statisticians.⁹

Extending patient choice

In the year that Working for patients was published, then secretary of state for health Kenneth Clarke promised: ‘In order to bring more choice to patients, GPs and hospitals will be required to tell patients what their range of services will be’.

The rhetoric that ‘the money would follow the patient’ was rapidly replaced by the patient following the money in the block contracts which health authorities negotiate. The reforms provided users with no means, either as individuals or collectively, to influence either service providers or purchasers directly, and the rapidly increasing fragmentation and complexity of the system following the introduction of the purchaser-provider split made talk of a ‘seamless service’ sound increasingly remote from reality. This was reflected in the actual experiences of service users; for example, a survey of consumer views of the NHS found the proportion of people experiencing difficulty arranging inpatient hospital treatment doubled between 1989 and 1993.¹⁰

In sum, far from creating a system in which bureaucracy melts away, providers freely compete for business and patients are always right, the post-reform NHS has generated new battalions of managers, new layers of regulatory control and a fragmented service in which patients remain as confused and powerless as ever. But, paradoxically, the reforms have also created new opportunities to pursue an agenda of democratic accountability, public health promotion and user participation. The dilemmas which face the next Labour government are particularly stark.