The National Health Service (NHS) in the UK

The National Health Service (NHS) in the UK was founded in 1948 and was the first state-run freehealthservice in the world. It originated at a time of national euphoria following victory in World War II,which generated a sense of confidence and solidarity among politicians and public. In particular it wasfelt that class distinctions were finally disappearing. The extensive rationing of products, both duringand after the war, played a big part. Not only did this result in queuing for goods by rich and poor alike,but it gave the government a sense that state control of distribution was not only possible but in manycases desirable. The basic objective was to provide all people with free medical, dental and nursingcare.It was a highly ambitious scheme that rested on various premises that have since proved flawed.These were:1 The demand for health care was finite; it was assumed that some given amount of expenditure wouldsatisfy all of the nation’s health wants.2 Health care provision could be made independent of market forces; in particular doctors were notsupposed to consider costs in deciding how to treat individual patients.3 Access to health care could be made equal to all;this means that there would be no preferential treatment according to type of customer, in particularaccording to their location.The flaws became more obvious as time went by, and were aggravated by thefact that the system was based on the old pre-war infrastructure in terms of facilities. This meant that theprovision was highly fragmented,with a large number of small hospitals and other medical centres. Thefirst flaw became apparent very quickly: in its first nine months of operation the NHS overshot itsbudget by nearly 40 per cent as patients flocked to see their doctors for treatment.Initially it wasbelieved that this high demand was just a backlog that would soon be cleared, but events provedotherwise. Webster,the official historian of the NHS, argues that the government must have had littleidea of the ‘momentous scale of the financial commitments’ which they had made. Since its foundation,spending on the NHS has increased more than fivefold, yet it has still not kept pace with the increase indemand. This increase in demand has occurred because of new technology, an ageing population andrising expectations. At present it is difficult to see a limit on spending; total spending, public and private,on healthcare in the USA is three times as much per person as in the UK.However,when it comes toperformance compared with other countries the UK does not fare that badly. In spite of far largerspending in the USA, some of the basic measures of a country’s health, such as life expectancy andinfant mortality, are broadly similar in the two countries. The United States performs better in certainspecific areas, for example in survival rates in intensive-care units and after cancer diagnosis, but eventhese statistics are questionable. It may merely be that cancer is diagnosed at an earlier stage of thedisease in the USA rather than that people live longer with the disease. Performance can also bemeasured subjectively by examining surveys of public satisfaction with the country’s health service. A1996 OECD study of public opinion across the European Union found that the more of its income that acountry spends per person on health, the more content they are about the health service. This showedthat, although the British are less satisfied with their health service than citizens of other countries arewith theirs, after allowing for the amount of spending per head the British are actually more satisfiedthan the norm. Italy, for example, spends more per head, yet the public satisfaction rating is farlower.There are a number of issues that currently face the NHS. The most basic one concerns the
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location of decision-making. This is an aspect of government policy which largely relates to normativeaspects, though there are some important economic implications in terms of resource allocation. Theother issues again have both positive and normative aspects. The use of private sector providers andcharges for services are important issues,. In terms of spending, once it is recognized that resources arelimited, there is the macro decision regarding how much the state should be spending on healthcare intotal. Then there is the micro question of where and how this money should be spent, and this issueessentially concerns factor substitution and opportunity cost. A number of trade-offs are relevant here,and some examples are discussed in the following paragraphs.1. Beds versus equipment. Treatments are much more capital-intensive than they used to be in pastdecades, owing to improved technology. This has the effect of reducing hospital-stay times, and 60per cent of patients are now in and out of hospital in less than a day compared with weeks or monthspreviously.This can reduce the need for beds compared with equipment.2. Drugs versus hospitals. Health authorities may be under pressure to provide expensive drugs, forexample beta interferon for the treatment of multiple sclerosis. This forces unpleasant choices.Morgan, chief executive of the East and North Devon Health Authority, has stated ‘It will beinterferon or keeping a community hospital, I can’t reconcile the two.’3. Administrators versus medical staff. In recent years the NHS has employed more and moreadministrators, whilst there has been a chronic shortage of doctors and nurses. This was partlyrelated to the aim of the Conservatives when they were in office to establish an internal market . Thehealth secretary, Milburn,was trying to reverse this trend; in a ‘top-to-toe revolution’ Milburnappeared to want a new modernization board of doctors and nurses to replace the existing board ofcivil servants. The NHS’s chief executive, Langlands, resigned. In the hospitals also there were moreadministrators, and these took over much of the decision-making previously done by doctorsregarding types of treatment. This became necessary because of the clash between scientificadvance, increasing costs and budgetary constraints. It became increasingly obvious that rationinghad to take place. Related to this issue, nurses were also having to do a lot more administrative workwhich could be performed by clerical workers. This happened for the same basic reason as before:more information needed to be collected from patients in order to determine the type of treatment.4. Hospital versus hospital. Because of the piecemeal structure that theNHS inherited it has tended toprovide healthcare in an inefficient way. Hospitals and other facilities are not only old and in need ofrepair, but in many cases small, separated geographically, and duplicating facilities. Division oflabour is often non optimal.In Birmingham, for example, there is an accident and emergency unit atSelly Oak Hospital, whereas the brain and heart specialists who might need to perform urgentoperations on those involved in car crashes or suffering heart attacks are at the neighboring QueenElizabeth Hospital. Thus the issue often arises whether it is preferable to concentrate facilities andstaff by building a new and larger hospital to replace a number of older facilities.5. Area versus area. At present there is much variation in the services provided by different local healthauthorities. For example, some restrict, or do not provide, procedures such as in vitro fertilization,cosmetic surgery and renal dialysis. This has led to the description ‘postcode prescribing’. Much ofthis has to do with the differences in budgets relative to demand in different areas, and is anotherexample of the greater visibility of rationing.
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Questions1 Illustrate the trade-off between administrators and medical staff using anisoquant/isocost graph. Explain the economic principles involved in obtaining an optimalsituation. How would this situation be affected by an increase in the pay of doctors andnurses?2 What problems might be encountered in determining this solution in practical terms?3 Illustrate the hospital-versus-hospital trade-off using an isoquant/isocost graph andexplaining the economic principles involved in obtaining an optimal situation. In whatimportant respects does this issue differ from the issue in the previous question?
Case Study 2Case study 7.1: BankingThere are various theoretical reasons why economies of scale should occur in the bankingindustry:1 Specialization of labour. There is considerable scope for this as cashiers, loan officers,account managers, foreign exchange managers, investment analysts and programmers canall increase their productivity with increased volume of output.2 Indivisibilities. Banks make use of much computer and telecommunicationstechnology. Larger institutions are able to use better equipment and spread fixed costsmore easily.3 Marketing. Much of this involves fixed costs, in terms of reaching a given size ofmarket; large institutions can again spread these costs more easily.4 Financial. Banks have to raise finance, mainly from depositors. Larger banks can dothis more easily and at lower cost, meaning that they can afford to offer their depositorslower interest rates.There are also reasons why banks should gain from economies of scope; many of theirproducts are related and banks have increasingly tried to cross-sell them. Examples aredifferent types of customer account, accounts and credit cards, accounts and mortgages orconsumer loans, and even banking services and insurance. There has also been a spate ofbank mergers and acquisitions in recent years, often involving related institutions likebuilding societies, investment banks and insurance companies. Many of these institutionshave been very large in size, with assets in excess of $100 billion. Examples are Citibankand Travellers Insurance (now Citigroup), Bank of America and NationsBank, ChaseManhattan and J. P. Morgan, HSBC and Midland; both NatWest Bank and AbbeyNational Bank in the UK have been the object of recent takeover bids. This would tend tosupport the hypothesis that ‘bigger is better’. The empirical evidence, however, is notsupportive of the ‘bigger is better’ policy that many banks seem to be following. Anumber of empirical studies have been carried out regarding commercial banking andrelated activities, in both Europe and the United States. Some US studies in the early1980s found diseconomies for banks larger than $25 million or $50 million in assets, avery small size compared with the current norm (the largest banks now have assets inexcess of $500 billion). More recently a greater availability of data has enabled research
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to be carried out on much bigger banks, as deregulation in 1980 led to interstate bankingin the United States. Shaffer and David examined economies of scale in ‘superscale’banks, that is banks with assets ranging from $2.5 billion to $120 billion in 1984. Theyestimated that the minimum efficient scale of these banks was between $15 billion and$37 billion in assets, and that these larger banks enjoyed lower average costs than smallerbanks. Many of the studies have been summarized by Clark in the USA. In particular,Clark’s conclusions were that there are only significant economies of scale at low levelsof output (less than $100 million in deposits). Furthermore, it appeared that economies ofscope were limited to certain specific product categories, for example consumer loansand mortgages, rather than being generally applicable.Questions

4. In view of the empirical evidence, what factors do you think might be responsible forthe current trends of increasing size and mergers?