Picture of health, by John Appleby

3 Jul 08
The NHS is not looking bad for 60, and with the government rolling out a new ten-year plan there's plenty of life in the health care system yet. But, as ever, the big issues are all about funding, as John Appleby explains

04 July 2008

The NHS is not looking bad for 60, and — with the government rolling out a new ten-year plan – there's plenty of life in the health care system yet. But, as ever, the big issues are all about funding

As the NHS celebrates its sixtieth birthday this week, what might its first minister, Aneurin Bevan, make of the service he helped create? A new ten-year-plan, launched this week by health minister Lord Darzi, promises a patient-centred shift in focus, and fresh debates are emerging about the direction of travel. But then, the health service has never been a stranger to controversy, particularly when it comes to its ever-expanding funding needs.

Politically and financially the early years of the NHS were turbulent, to say the least – overspending, wrangles about patient charges, worries that demand could not be met and arguments about what it should provide and where.

Today, the NHS might have won the battle against overspending, although to the public the size of last year's surplus – £2bn – looks less like prudence for the future and more like care forgone now. Prescription charges are again on the agenda, with abolition in Wales and Scotland, but not (yet?) in England and Northern Ireland. And, despite the huge funding increases of the past few years, there are still headlines about patients being denied care and renewed calls for alternative ways to fund the service.

Yet over the next few years UK health care spending, both public and private, is set to break new records as it edges nearer to consuming one pound in every ten of the entire measured economic activity of the country.

This year, public spending on the NHS will account for almost 8% of gross domestic product and around 20% of all government spending. And with more than 1.5 million employees, around one in 20 of all working age people are on the NHS payroll. As for the future, all indications are that it's going to get a lot bigger.

The financial origins of the service were, by today's standards, small. For the first full financial year, spending was around £370m, representing about one and a quarter days' expenditure today in cash terms. Allowing for inflation, it would be around £10.5bn, which is still just one-tenth of the total NHS budget in 2008/09.

Demand in the health service's first few years was huge, fuelled by millions of people who needed hospital treatment, or a decent set of teeth and spectacles. The resulting overspending fuelled Treasury fears about the financial sustainability of the NHS and the control of public spending. All parts of the service were facing problems. Hospital spending was considerably over budget; spending on dentistry was three times higher than estimated and on ophthalmic services almost five times higher. Overall, the NHS pay bill rose by more than a fifth in one year.

If all this sounds familiar, it's worth remembering that at the time total NHS spending was just 3% or so of GDP. For ministers and the Treasury of the time, however, action was needed. Charging patients was always an option as far as the Treasury was concerned, and in 1951 fees for prescriptions and co-payments for some dental and ophthalmic services were introduced.

The NHS historian Charles Webster reports that in a parliamentary debate on the Bill to introduce charges, Bevan, never short of an ability to deliver a white-knuckled verbal jab to the throat when required, attacked his own front bench as those 'who appeared as grinding the faces of the poor with all the malice of the Tories but without their excuse for believing in it'.

Bevan would smile now as Wales has abolished prescription charges and Scotland is shortly to follow. The tension between a system funded collectively on the basis of ability to pay (through a mildly progressive tax system) with free access based on need, and one that meets all needs and wants at an individual patient/citizen level remain unresolved.

Arguments about 'topping up' NHS care, for example, echo similar wrangles in the late 1950s for private patients to have access to prescription drugs on the same basis as NHS patients.

Five years after the inception of the NHS, money worries still troubled the government – now Conservative. A government committee chaired by Cambridge economist Claude Guillebaud suggested that the service, far from being financially out of control and unsustainable, was generally good value, but underfunded. The committee's technical support team (the not inconsiderable academic talents of London School of Economics social administration professors Brian Abel-Smith and Richard Titmuss) demonstrated that while NHS spending had risen by more than 8% in real terms in its second year, by 1953/54 it had fallen back to its 1948/49 level. They also pointed out that as a proportion of national wealth, around 3% of GDP was relatively insignificant given the importance of the service.

Despite attempts to cap total spending and numerous economy drives, NHS funding climbed from around 3.5% to 5% of GDP in the 1960s and 1970s. During these decades, overspending, problems with funding manifesto commitments, hospital building schemes and financial sustainability were almost constant topics of policy debate and tension within government.

Changes in political administration over this period led to the abolition of prescription charges (followed fairly swiftly by their reinstatement), public clashes over doctors' and dentists' pay and, with the Conservative government of 1970, attempts by Sir Keith Joseph to switch the funding base of the NHS away from general taxation and towards a social insurance model. This last idea was resisted by the Treasury and many health officials, who saw it as a more costly and potentially inequitable way of raising finance for the NHS.

External economic factors – notably the oil crisis – affected the public sector in the 1970s. Spending on the NHS as a proportion of GDP fell by 0.5% from the middle to the end of the decade. General inflation was enormous from 1975 to 1980, with prices increasing by 150%. In 1975/76 alone, prices rose by more than 25%. During the 1980s, spending as a fraction of national wealth drifted down again from a high of 5% to 4.4%.

NHS funding jumped in the first full year of Margaret Thatcher's new 1979 government, as with many previous administrations' first years in power. But as often in the past, a combination of Treasury parsimony and, as Harold Macmillan noted, 'events, dear boy, events', soon diminished government generosity and funding levels fell back once again. Pressures to cut costs were unabated. Cleaning and domestic services were to be tendered competitively, 'cost improvement programme' targets had to be met.

The Conservatives' introduction of an internal market in the NHS, following the 1989 Working for patients white paper, was destined not to be another historical footnote. Increased funding oiled the wheels during the 'slow take-off' of the market, reaching a new high of 5.7% of GDP in the early 1990s. But, with by now boring repetition, as each administration progressed, so funding tightened again. Even Tony Blair's New Labour government in 1997 was to disappoint supporters as the new prime minister kept his manifesto pledge to stick to the Conservative public spending plans.

But pressures to spend more became intense and the government took a seminal political decision in 1999. With a growing economy and increasing clamour from the service that it would not be able to meet the government's health programme, the decision was taken to find as much money as possible for the NHS. This was analytically fleshed out in 2002 by Sir Derek Wanless' review of the future of NHS funding, which recommended substantial spending increases – up to 12% of GDP by 2023.

Although the government was officially committed to abolishing the internal market and sweeping away GP fundholding, policy changed when Alan Milburn took over from Frank Dobson as health secretary. Milburn appropriated three central ideas of Thatcher's reforms: the 'internal market', GP fundholding and self-governing hospitals.

Although the funding boom allowed the NHS to increase its workforce by around a third, and to make major improvements in waiting times, a King's Fund review by Wanless concluded that it had failed to squeeze out the productivity improvements expected. For many, however, the financial puzzle of the time was how an NHS flush with cash could overspend. A smallish overspend in 2004/05 turned into a half billion pound net overspend in 2005/06 and an unprecedented gross overspend of around £1.4bn.

This financial trend, coupled with a new accounting system that could rapidly accelerate hospitals' debts from year to year, was unsustainable. Patricia Hewitt was the unfortunate minister on watch and staked her political (or at least ministerial) future on turning the ship around. Strenuous efforts by the health service ensured that 2006/07 ended with a net surplus, though still with around a fifth of English NHS organisations in debt. By last year, the financial pendulum had swung even further into the black, achieving (if that's the right word) a surplus of almost £2bn.

Also in 2007, as expected, the Comprehensive Spending Review laid out a lower growth future for the NHS, with the next few years set to receive half the real growth of the previous seven. So what of the future, not just the next few years, but, indeed, the next 60? Has the NHS made a once-and-for-all great financial leap forward? It has money in the bank and has all but caught up with its European neighbours. So, is this it?

Well, historical experience alone suggests that in terms of funding, this is almost certainly not it. The long-term trend in NHS spending is, blips aside, upward. Just a continuation of that trend would suggest that by 2068 spending will be in the region of 16% to 18% of GDP – double today's levels and similar to current US levels of spending. Trends over the Atlantic suggest spending levels of around 40% of GDP over the next 70 years.

Pressure to spend more will come from the usual sources: increased public expectations; medical advances; a rising population (around 80 million in 60 years' time); and, to a lesser extent than many suppose, increasing ageing of the population (although the impact on social care spending will likely be greater).

But we also know from international comparisons that as countries get richer they tend to spend more on health care. The relationship between per capita GDP and per capita health spend across countries is strong and persistent. In the jargon, the income elasticity of health spend is greater than one. With real per capita GDP in the UK likely to double over the next 60 years and the value we attach to the outputs (health) produced by the NHS increasing as we get richer, the consequences for health spending are obvious.

Will we all be happier and healthier with higher spending? No doubt we will, but history strongly suggests that at the margins of spending – no matter what the absolute level is – the same rationing dilemmas will still need to be grappled with. Equally, the same worries about affordability and sustainability will continue to resurrect arguments for alternative ways to pay for health care.

Professor John Appleby is the chief economist of the King's Fund

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