Sunday, 29 August 2010

Profit-taking and the NHS - inevitable or avoidable?


The inspiring and sceptical legal blogger Jack of Kent asks whether part of the problem with the NHS relates to ‘profiteering’:

Huge profits are made by pharma and PFI contractors under NHS model. Surely we should not have such a profit-based approach to healthcare?

Now this rather begs the question since in addition to Jack’s examples we could identify thousands of other ‘for-profit’ businesses – large and small – making good money from providing goods and services to the NHS. It is not a matter of the NHS being wholly isolated from the private sector. A moment’s thought would show that (assuming we are not in the process of establishing a soviet system in the UK) you cannot insulate the NHS from private, for-profit enterprises. It would be unreasonable to expect the NHS to manufacture its own toilet tissue, sew all the operating theatre gowns, make the scalpels, produce the swabs and provide all the equipment required to operate a modern healthcare system.

What Jack is really asking is whether the profits taken by suppliers (however defined) to the NHS are excessive? And, if this is the case, whether the system itself is in some way to blame for such ‘monopoly’ profit? Finally, we need to ask whether such profit-taking is an acceptable price for maintaining a free, national service?

Are profits for NHS suppliers ‘excessive’? I’m not in a position to answer that question with anything other than an anecdote – after all to answer the question would require a definition of ‘excessive’ and an assessment of the profitability for all suppliers or contractors! However, some years ago I undertook a substantial piece of consultancy for a specialist NHS supplier. My conclusions were that the NHS was (and is) a cash rich organisation and that procurement decisions were determined by budgets, past costs and bureaucratic trip wires (e.g. ISO9001, IIP) rather than by understanding the costs of producing supplies or the sustainability of the supplying industry. The net impact of this was that suppliers – especially in specialised areas of production like that of my client – were able to take higher margins than they could in sectors driven by market forces rather that procurement regulations.

So we can see that the system is, almost certainly, contributing to ‘excess’ profits for (some) suppliers. Jack mentions PFI (private finance initiative) contractors which represent a special case in that public sector risks were retained so as to allow an accelerated programme of development. We got more hospitals, more quickly than would be the case under a more regular construction model – but at a considerable cost in the form of excess rents. The most obvious alternative to this approach – allowing hospital trusts to leave the NHS and self-fund development – was rejected because of the political risk and the perception of threat to the founding principles of the service.

Which brings us to the “price” of a service free at the point of need – and whether this cost is set right or indeed whether we can accept that part of the cost is in the form of private profit. Plainly this is a value judgment rather than a matter of economic rationality. However, ‘private’ systems such as that in the USA get a pretty bad press since they exclude too many (mostly poor) people. But the idea of a single national service – however tidy and attractive – was always something of a pipedream. We reflect on bureaucratic incompetence and bemoan the profits of ‘Big Pharma’ but fail to realise that the model we adopted promoted monopoly supply (over the short-run which is all that matters) and built in inevitable procurement inefficiencies that could be exploited by suppliers.

Finally, we should recognise that in producer-oriented systems such as the NHS, there is a hidden profit-taking in the form of higher wages, larger establishments and perks or privileges. British doctors – while less well paid that those in the USA – are well-paid (the popularity of medicine as a degree course reflects the economic truth that graduates in the discipline have the highest average income prospects) and complemented by a large establishment of support. We regard this as being ‘inefficiency’ and wail about ‘too many managers’ but it is what would be ‘profit’ in a private organisation.

None of this is intended to suggest an alternative – there are many different models – but to suggest that providing a universal service has costs beyond those we would expect from a free market system. But those costs appear inevitable if we are to deliver healthcare to those not able to pay for it – and part of that additional cost will, as night follows day, end up either in the pockets of healthcare employees or else in the profit columns of healthcare suppliers.


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