A better class of choice, by Julian Le Grand

30 Mar 06
Critics of choice in public services claim that ordinary people don't want it. Quite the opposite, argues Julian Le Grand it's the least well-off who stand to gain the most

31 March 2006

Critics of choice in public services claim that ordinary people don't want it. Quite the opposite, argues Julian Le Grand – it's the least well-off who stand to gain the most

Choice and competition are not only desirable in public services, but essential if the welfare state is to survive. They will make services more responsive and efficient and more equitable and socially just.

Now these are not easy concepts to sell; they are controversial and can be easily caricatured. But neither are they simply the result of scribblings by mad-eyed policy wonks at Number 10, desperate for short-term solutions. In fact, they reflect a well-grounded analysis of the problems with public services, and the ways in which they can be resolved.

When Tony Blair's government came into power, public services were creaking at the seams. Take the National Health Service. It has many virtues, not least its founding principle that health care should be freely available to all, regardless of income, class, gender, ethnicity or religion. But the problems were legion.

Waiting times were astonishingly long. Patients were supposed to live up to their appellation, and be patient. Even a year after the government was elected, 185,000 patients were still waiting more than nine months for elective surgery in England and 67,000 for more than 12 months. As late as 2002, 98% of the population lived within an hour's travel time of up to 100 available and unoccupied NHS beds – and this at a time of massive waiting lists.

The system seemed to be organised more for the benefit of those working in it than for those using it. And if patients were dissatisfied, only the better off – those with private insurance – had the opportunity to go elsewhere. The NHS was also poor on innovation: the incentives for adopting good ideas were not there.

Even equity – the NHS's founding principle – was not achieved. A recent review by the London School of Economics and the Department of Health found that poorly educated people who are unemployed or on low incomes use health services less than the better off. Intervention rates for coronary bypasses and angiography following a heart attack were 30% lower in the lowest socio-economic groups; and for hip replacements 20% lower, despite a 30% higher need. A one-point move down a seven-point deprivation scale resulted in GPs spending 3.4% less time with the patient.

Education was in not much better shape. In 1997, one-third of children left primary schools without having mastered the basics in English and maths; only a third of pupils in inner London and Birmingham attained five or more good GCSEs; less than half of primary schools had good or excellent teaching, and only just over half of secondary schools.

Part of the problem was money. The 2001 Wanless Report estimated that, relative to the European Union, the cumulative underspend on the NHS was £267bn. Public spending on both the NHS and education has, of course, risen: by at least 50% in real terms between 1997/98 and 2004/05, and is projected to rise by even more by 2008/9.

But money wasn't the only issue. Although the resources being put in are unprecedented, previous governments have also put large sums into the NHS and education without getting the results. The old state monopoly NHS did not deliver, even when its mouth was stuffed with gold. In fact, it is interesting how little the NHS's problems are directly to do with money. Even the waiting list problem was at least as much a result of inefficient use of capacity.

So where did these problems – and the comparable ones in education – originate? Many derive from the monopoly nature of state provision. In the unreformed NHS, patients had little choice over where, when and how they were treated; in the unreformed education system, parents had little choice of school. This disempowered patients and parents. It also meant providers had no incentives to improve. Chaining people to their local GP practice, hospital or school allowed providers to continue offering poor or tardy services with impunity.

One strategy for dealing with monopoly providers is top-down performance management: ordering them to offer a good service, setting targets, and penalising them if they fail. This has been part of the government's strategy and has been successful to some extent. Most NHS targets have been met, and some aspects of service delivery sharply improved, at least in England.

In fact, it is interesting to compare the good performance in England with the relatively poor performance in the rest of the UK. Immediately after devolution, the Welsh Assembly abandoned waiting-time targets and reduced its reliance on directive policy, concentrating instead on promoting co-operative working between sectors. The result was a massive increase in waiting lists, despite Wales having more resources per head than England. Nor were things better in Scotland or Northern Ireland. Each again had more resources per head than England, each refused to adopt English performance management, choice or competition, and each suffered an increase in waiting lists while they were falling dramatically in England.

In education, performance management has also worked, with numeracy and literacy sharply improved, not least because of the top-down imposition of a numeracy and literacy hour. But heavy performance management from the top is not trouble-free. A ceaseless bombardment of instructions demotivates and demoralises providers, especially professionals used to a high degree of autonomy and trust. And targets have their own problems. They discourage continuous innovation and improvement, and can distort priorities: what is not targeted is ignored. As is often said, one can hit the target but miss the point.

They can also lead to 'gaming': ranging from straightforward fiddling of the figures to inappropriate changes in behaviour (such as unnecessarily admitting patients into wards from accident and emergency departments to meet a four-hour target). Penalties for missing targets can seem arbitrary and unfair.

Overall, performance management is not a long-term solution. What is needed instead is a system with incentives for reform embedded within it. These incentives should come from empowering service users. One way of doing this is to strengthen what's called in the jargon 'voice'. 'Voice' mechanisms allow users to express their views directly with providers, either informally or through more formal ways, such as complaints procedures, becoming a parent governor, patient and public forums, joining a foundation trust board, and so on.

These forms of voice have their place. But, fundamentally, they are not the answer. Partly this is because they are often cumbersome to operate, but principally it is because they are largely impotent in the absence of choice, or power of 'exit'. Only if the dissatisfied can go elsewhere is there a real incentive to improve. Choice, in other words, gives power to voice.

Another problem with voice is that it favours the better off. They are more likely to have family or friends who work in the health services, and have a better knowledge of the system. Patients from more deprived backgrounds might be less articulate and confident about describing their symptoms, inhibiting a diagnosis and access to appropriate treatment. The same applies to education, where the most likely people to become parent governors are again the middle classes.

So if we cannot rely upon performance management or 'voice' to reform public services, what can we do? There is of course one answer: introduce choice and competition. If patients and parents have choice between competing providers, they have power. For providers then have a powerful incentive to meet the needs and wants of their users; those that do so will succeed, and those that do not will fail.

However, certain conditions have to be fulfilled for choice and competition to work. First, the money must follow the choice. There must be negative consequences for not being chosen. So funding systems are needed that encourage providers to be attractive to would-be users and to use their resources efficiently. One example is payment by results in the NHS – where hospitals get paid according to treatments they actually provide. Formula funding for schools is another, as it is based on the number of pupils they attract. If providers can reduce costs without reducing quality, they will make a surplus to spend on service improvements and enhancing staff pay and conditions.

Another condition for choice to work is that there must be alternative providers. The illusion of choice is worse than none at all. For proper contestability, providers must have real independence, and be entrepreneurial and innovative. Hence the policy drive towards developing new forms of provider, including foundation trusts, independent sector treatment and diagnostic centres, academies and trust schools.

Patients and parents also need good information on quality – not always easy to provide. Plus, there have to be ways to deal with failure; what to do about hospitals and schools that are not chosen. And ways to deal with excess demand.

Over and above these legitimate concerns, there are three major lines of criticism that need addressing. The most common is the assertion: 'people don't want choice: they want a good local service'. In fact, numerous surveys show that choice is popular. The latest British Social Attitudes Survey, for instance, shows that 63% thought patients should have a great deal or quite a lot of choice of hospital. Interestingly, 67% of working-class respondents voted for choice, compared with 59% of the managerial and professional class and 69% of those with no educational qualification wanted choice, compared with 56% of those with a higher education qualification. In other words, the groups that critics think will be disadvantaged by choice seem to want it most.

The Audit Commission found the same when it surveyed people's reactions to more choice for local government services. Those in favour of choice were 'the least privileged, women and those who lived in the North and Midlands'.

In general, it is the poor, the dispossessed and the disadvantaged who want choice more than the allegedly rabidly pro-choice middle class. Nor, on reflection, should this be surprising. As we have seen, the middle class already do well out of the unreformed no-choice NHS and education system.

The second major line of criticism is that, even if the poor do want to make choices, they will not do so effectively. Also, better schools and hospitals will cream-skim or cherry-pick the good pupils, and easy patients; and since these are most likely to be middle class, will this not discriminate against the poor?

An evaluation of the NHS choice pilots found little difference in take-up by social groups, although considerable assistance was given to choosers with transport costs, and through each being allocated a patient care adviser. In fact, the PCAs were so successful that the idea has been taken over by the government's education white paper, which proposes dedicated choice advisers for the least well-off parents. The white paper also proposes further extending the right to free school transport for children from poorer families.

But what of the danger of cream-skimming? This is a real problem, especially in education. One possibility is to introduce some kind of stop-loss insurance scheme whereby providers faced with a user whose costs lie well outside the normal range gets allocated extra resources. Another is to take admission decisions completely away from hospitals or schools. This is already envisaged in the NHS with the introduction of e-booking and choice at the point of referral. And the compromises that look like being agreed on the Education Bill are moving in this direction.

A third alternative is to risk-adjust the funding system so that higher cost users have higher 'prices' associated with them. A certain amount of this is going to happen under the national tariff system in health. However, this is a complex and difficult business. A simpler system might be to deprivation-adjust the money that follows choice. In education, for instance, the amount each school receives could be associated inversely with an area deprivation index, such that pupils from poor areas would carry a higher weight. Schools that took on children from poorer areas would then have a strong positive incentive to specialise in their education.

The third criticism of choice and competition – and for some the most fundamental – is that they threaten the 'public realm'. It is said that public services are not like supermarkets, especially when you consider their responsibility to users. Public sector employees incorporate values of altruism and social justice – in contrast to those in the private sector, driven by a ruthless search for profit. To use a well-worn metaphor of mine: the public sector is run by knights, the private sector by knaves. The introduction of competition, especially from the private sector, will inevitably drive out the knights. Hospitals and schools will become Tescos and Sainsbury's.

It is worth noting that this view that public services are staffed by helpful friendly knights is not necessarily held by the public. When Mori asked which adjectives best described public services in Britain today, the highest ranked were (in descending order) 'bureaucratic', 'infuriating', 'faceless', 'hardworking' (a positive note there), 'unresponsive' and 'unaccountable'. The lowest ranked were 'friendly', 'efficient', 'honest' and 'open'.

Nor is the public afraid of the knaves in the private sector. When the British Social Attitudes Survey asked people whether government or business were best at providing a good quality service, 51% said a private company compared with 41% for government. And when asked which was best at running services cost-effectively, 55% preferred private companies, compared with 39% for government. Another survey of attitudes towards private companies providing services for the NHS found that 71% would be happy to have their NHS operation in a private hospital compared with 11% who would be unhappy.

The area where people did prefer government over private companies was in the ability to direct services where they are needed most. This is presumably because respondents believed that private companies operating in private markets would favour the better off. But, as we have seen, the choice and competition reforms in the public sector can be designed to encourage providers to meet the needs of the less well off, and even to specialise in doing so.

That the private sector can be more cost-effective is being borne out by evidence. The new independent sector treatment centres appear to be carrying out operations considerably faster than the average for the NHS. True, the NHS average includes some more complex procedures than the ISTCs normally perform. But the difference is way too large for this to be a plausible explanation of the gap. The independent centres also have over 90% satisfaction ratings from patients. One recent report found that those treated in specially designed treatment centres or private hospitals were more positive about their experience than those who had surgery in a normal NHS hospital.

The overall point is not that the NHS is intrinsically inefficient or could not match private sector productivity if it were appropriately organised. It is simply that, until recently, it had no incentive to do so. Now, with the competition and choice reforms, the incentives are there – and I would expect some dramatic improvements in NHS efficiency and productivity.

The truth is that the public sector has no monopoly on virtue, the private sector has no monopoly on vice. Public institutions are not run only by knights; private firms are not run only by knaves. The key is to understand the complexity of individual motivations – and design incentive systems accordingly. The introduction of choice and competition into public services is the best way to do so.

Julian Le Grand is professor of social policy at the London School of Economics and former health policy adviser to the prime minister. This feature is based on a lecture given last month at the LSE


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