The Maynard Doctrine: How to fund the NHS - zombie policies rise yet again

Health economist Professor Alan Maynard would much rather not have to write this article again, but evidently it's still necessary. Sigh.

After six years of inadequate funding of the NHS, waiting lists are worsening. Workforce problems are acute, and 65 per cent of hospital trusts were in deficit at year end 2015-16.

It is remarkable that service provision has maintained such reasonable levels when health and social care funding has been so parsimonious.

The government's sustained claims of a front-loaded funding increase of £10 billion were comprehensively discounted by a recent Commons Health Select Committee report. Its courageous chair Dr Sarah Woolaston MP wrote to the Chancellor about these claims, backed by committee colleagues across the Parliamentary political spectrum.

The limited funding increase to 2020 is apparently £4.5 billion: this is supposed to both remedy deficits in 2016-17, fund restructuring of the NHS in England and meet the demands of an ageing population and technological innovation.

This is unlikely to prove adequate, as improved performance comes slowly and may be quite limited because of capital controls - and uncertainty about the benefits of horizontal integration by mergers and vertical integration between hospitals, primary and social care.

Consequently, there is a rising tide of recommendations to create increased NHS funding.

Particular interest groups advocate funding options that enable them to achieve their own objectives. Furthermore, their advocacy is re-cycled regularly whenever NHS funding is parsimonious.

This healthcare funding merry-go-round of debate about introducing or raising user charges is what Professor Robert Evans described as a "policy zombie" problem: however inefficient and inequitable the proposed policy, and however well it is dismissed by opponents, it re-emerges again as a potential influence on political choice. It refuses to die.

To illuminate the funding debate more fully, it is necessary to clarify the problems associated with the funding options.

What is the best way of funding the NHS?
Firstly it is necessary to spell out the costs and benefits of competing funding choices. In particular:

i) Who should pay? The answer, of course, is that households pay in terms of reduced income, profits, interest and rent from the owners of physical and human capital assets. The pertinent policy issue is which households bear the burden of funding increased NHS budgets? This we will call the equity target.

ii) Who will be affected by payment systems? Will patient demand be affected and what are the administrative costs of alternative funding methods? This we will call the efficiency target

What are the funding options?

i) Patient charges

ii) Private insurance

iii) Social insurance

iv) Taxation

v) “Earmarking” revenues for the NHS

Patient charges
Patient charges are a tax on the ill: they are inequitable. They are a particular burden on patients with multiple-morbidities, increasingly often (albeit not always) the elderly, who are more likely to be on fixed incomes that they cannot increase by working more.

As with prescription charges in England, patient charges often come with exemptions. Exempting expectant mothers, the disadvantaged on social security budgets, children and the elderly reduces revenue, and is administratively expensive.

The Rand Health Insurance Experiment in the USA showed nearly 40 years ago that user charges reduce the demand for healthcare. It is likely that such reductions in utilisation would delay NHS care and lead to subsequent increases in demand for support as patients’ health declined.

Patient charges shift the burden of funding to users. The attraction of charges for government is that they shift the burden of paying from the public purse to users. Charges are thus attractive for those focused on reducing public expenditure.

Private insurance
Currently, the rate of growth of private insurance is quite low. The industry, like the NHS, is striving to hold down provider costs and patient utilisation. Without increased control of provider charges, premiums rise and demand for insurance will remain modest.

Despite Competition And Markets Authority efforts to increase hospital competition, the provider market survives anti-monopoly efforts. The major private funding growth sector is self-pay.

There appears to be little scope for tax breaks to augment the take-up of private insurance. Such subsidies, as in Australia, fund the relatively affluent and reduce tax revenue.

Regulation of private insurance is usually quite extensive: in Australia, premiums are based not on individual risk but on the basis of community rating. Thus risk is redistributed - rather like in an NHS.

Furthermore, funding is based on an annual pay-as-you-go principle, not on the basis of investing funds to finance future benefits to insurees.

Insurance coverage typically involves part-payment by the patient i.e. co-payment. This has the same effect as charges, with additional costs associated with advertising among competing insurers and the need to recoup co-pays.

Private insurance is funded by individuals and sometimes employers, with the financial burden falls on individuals’ income and the profits of employers.

It tends be inequitable as coverage and co-pays depend on the income of patients. Access to care may be based on ability to pay.

It is also complex and expensive administratively, due to regulation and cost and demand inflation similar to the NHS: private insurers, like the NHS, are poor commissioners of care.

Social insurance
The funding model initiated by Bismarck and dominant in Germany, the Netherlands, France and Japan is based on social insurance funds - these are often related to employment status.

These insurance organisations are funded by payroll taxes proportional to income.

The NHS is partly funded by National Insurance, which is a proportional tax. Like continental social insurance funds, the word “insurance” is a fiscal illusion i.e. it is disguised taxation which is funded on a “pay as you go” annual basis; rather than a funded scheme dependent on individual lifetime contributions.

Social insurance is funded by employers and employees, which reduces personal incomes or profits, depending on how burden is shifted by the funding parties. It is administratively expensive: for example, in Germany there are multiple social insurance funds.

Taxation
Taxation can levied in many forms e.g. income, value added, corporation or duties on alcohol and tobacco. Value added tax usually raises consumer prices, and is regressive. Corporation tax reduces the profits of firms and the attractiveness of the UK for investors.

Alcohol and tobacco taxes are taxes on users, and are also regressive

Income tax is usually progressive i.e. the rich pay at higher rates than the less well off. It is easy to collect through PAYE and is paid by households.

Thus income tax is more equitable and an efficient way of collecting revenue for government

Earmarking/hypothecating
There is a naïve belief that earmarking (hypothecating, in the jargon) new funding for the NHS will ensure it is paid to the NHS.

The classic example of this being untrue was the Road Fund Act 1920 which earmarked revenue for the development of roads. In 1926, the then Chancellor of the Exchequer Winston Churchill plundered the road fund revenues to balance his budget, and argued that earmarking such funding in perpetuity was “ an outrage”.

In other words, earmarked funds never stay earmarked when politicians are under political pressure.

Conclusions
How should increases in the NHS budget be funded? The answer is inevitably linked to social values and political expediency.

The right may favour charges and insurance, to decrease and disguise tax burdens on their voters. The left may make similar efforts to divert attention and burdens on their voters e.g. the Blair government when funding increased NHS spending preferred to increase National Insurance contributions, rather than breach their undertaking not to increase income taxation.

The simplest and most equitable way of funding increased NHS budgets is by general income tax. However, it currently seems unlikely that the May government would adopt this option.

Oblique funding by general taxation from non-income tax sources and increased deficit financing is more likely, with the right continuing to press for charges, insurance and ear-marking.

Beware the march of these policy zombies! “Think tanks” funded by corporate and political interest groups regularly advocate charges and insurance as a means of achieving financing that protects the more affluent, even if transaction costs are inflated.

If such inequity is socially preferred, that is politically unavoidable and regrettable. Hopefully, transparency and political accountability can achieve outcomes which are equitable and efficient for patients and taxpayers.