Stresses and strains

Was the government too complacent?

The outbreak of Covid-19 will go undoubtedly down as one of the most traumatic social and economic upheavals of our time. At the time of writing, more than 200,000 people worldwide are recorded as having died and the true figure is undoubtedly higher. More will undoubtedly succumb. But as tragically high as these figures are, it is possible to imagine a far worse pandemic. A typical pandemic would be expected to strike more evenly across the age spectrum than Covid-19 which has predominantly impacted on those aged over 50. You do not have to be a virologist to imagine an even more terrifying disease which is more virulent and infectious than Covid-19. Indeed, the threat of such a pandemic is one of the natural disasters which form a key element in national disaster planning across the world.

Fortunately, such outbreaks are rare but precisely because of that it is so easy to become complacent about the risks which they pose. However, in what now seems like propitious timing, a year before we had even heard of Covid-19, a group of epidemiologists conducted a study to assess the preparedness of global health systems in the event of a global epidemic. They constructed an Epidemic Preparedness Index (EPI) covering 188 countries and based on five key metrics:  overall economic resources; public health communications; infrastructure; public health systems and institutional capacity. According to the authors, “the most prepared countries were concentrated in Europe and North America, while the least prepared countries clustered in Central and West Africa and Southeast Asia.”

All countries have expressed concerns that the outbreak of the disease would overwhelm their health systems, which is why they have imposed a lockdown to spread out the incidence of infections. Health experts are unanimous in their belief that containment and mitigation strategies are the first line of defence to combat a pandemic. Italy was one of the first countries, aside from China, to implement a lockdown on 9 March. At that time it had recorded 7,375 cases and 366 deaths. As of today, it has recorded 197,675 cases and 26,644 fatalities. The UK imposed a lockdown two weeks later than Italy, on 23 March, at which time it had recorded 5,683 cases and 281 fatalities. Almost five weeks later it has recorded 148,377 cases and 20,319 fatalities.

The debate in the UK focuses very heavily on the fact that the government was too late in implementing the lockdown and that it should have learned from the Italian experience. By the time it adopted this strategy, when its figures were similar to those in Italy two weeks previously, it was already too late and the path of the disease was effectively predetermined. There certainly does appear to be a lot of evidence to suggest the British government was reluctant to take such a dramatic measure although others suggest that the scientific advisers were slow to respond.

Either way it appears that the delay in implementing the lockdown played a role in allowing Covid-19 to become more widespread than it need have been although it is easy to be wise after the event. Indeed when Germany implemented a lockdown on 23 March, it had recorded 24,774 cases (more than either the UK or Italy at the same stage) but just 94 fatalities. It is thus likely that future research will concude that some governments were too slow to deploy their first line of defence. But this is not the whole story.

Or is it the lack of spending?

National health systems act as the second line of defence, offering options ranging from testing to intensive care. At this point the degree of funding provided to the health system really starts to come into its own. According to data compiled by the OECD, the UK had fewer medical staff per 1000 of population than many other European nations (see chart below). Although the proportion of doctors is below the OECD average, it is not too far out of line with other EU countries. But the number of nursing staff is somewhat lower. This might partially explain, for example, why the UK has been so slow in rolling out mass testing. To the extent that a shortage of trained medical staff at a time of emergency puts pressure on existing staff as overstretched resources are stretched more thinly, there is some evidence to suggest that funding constraints over the last decade have added to the strains facing the British NHS in recent weeks. Indeed, despite making great play of the fact that a number of temporary hospitals have been opened to add additional capacity to the health system, there have been complaints that there are simply not enough trained staff to provide the requisite services.

I have noted the strains on various parts of the public sector on numerous occasions in recent years and have pointed out the issues facing NHS funding (here, for example). In theory, of course, the NHS was protected from the worst of the austerity but there was still a slowdown in the rate of funding which meant that the supply of health care has not kept pace with demand. In terms of what the service offers, it can be regarded as efficient in an international context. For example, the NHS operates its critical care facilities with an 84% utilisation rate (higher than all other OECD countries bar Ireland, Israel and Canada, see chart below). But this also means that there is limited spare capacity to cope with emergencies. When it comes to the overall capacity of the system, the UK also has fewer intensive care beds per head of population than the OECD average.  

It is hard to avoid the conclusion that the NHS entered the Covid-19 crisis with the bare minimum of resources. For anyone who doubts the strains that the medical profession operate under in normal times, I highly recommend the book by former doctor Adam Kay, This is Going to Hurt, which is a litany of the humorous, bizarre and tragic circumstances routinely encountered by the medical profession. Anecdotal evidence gathered from my own discussions with medical personnel in recent years suggests that the strains intensified during the worst of the government’s austerity programme.

On the basis that demand for health services is infinite, some serious questions will have to be asked once the crisis is over as to what we require of health services in future and how we expect to pay for  them. It is pretty certain that no government will be able to deny funds to the NHS in the near future. Therefore, either spending in non-health related areas will have to be cut or taxes will have to rise. I even suggested a couple of years ago that a hypothecated tax to fund health spending might be something we need to consider. Whatever options we finally choose, the public will accept nothing less than a new deal for the NHS. The era of austerity is over although the question of how to pay for it all will be the subject of future posts.

The NHS and a US trade deal

It may or may not be the case that in order to facilitate a post-Brexit trade deal between the US and UK that will deliver “two and even three times what we’re doing now … everything will be on the table – the NHS, everything.” What is beyond dispute is that Donald Trump said it. Even though Trump appeared to backtrack from this position in a subsequent TV interview, he nonetheless articulated the reality of the UK’s post-Brexit choices. Without the heft that comes from being part of a larger economic bloc, the UK is going to look pretty puny in comparison to the likes of the US and China whose economies are respectively 7.3 and 4.8 times larger than the UK. Brexit supporters still cling to the fiction that the UK will be able to negotiate better deals with third countries than it currently enjoys as a member of the EU. Those with experience of conducting trade negotiations know this to be false. When it comes to opening up new markets, might is right.

This is going to put many of the contenders for the Tory leadership in an invidious position. Those who argue that the UK must leave the EU on 31 October, come what may, are in effect saying that they don’t care about the economic consequences and that the politics matters above all else. Boris Johnson has argued that the Conservatives face “potential extinction” if they cannot deliver Brexit. What he fails to point out is that they will face much the same fate if they get Brexit wrong. And risking the NHS, which is one of the few national institutions which the electorate continues to trust, would be one of the touchstone issues that could undermine them, allowing them to be outflanked by Labour. Indeed, a survey conducted by the Kings Fund found that a higher proportion of respondents thought leaving the EU would be bad for the NHS than those who believed it would be a good thing,

In what ways might a US trade deal put the NHS at risk? The most obvious concern is that US health service providers may be granted preferential access to the British market. This would imply the outsourcing of services currently provided by the state to the private sector – in other words, privatisation of large parts of the health service. As it happens, the NHS does already pay private contractors to run parts of the service. In fiscal 2017-18, almost 11% of NHS England’s outlays went to non-NHS organisations, with 2/3 of that figure going to private health providers (around 7.6% of total outlays). But figures compiled for the FT suggest that spending on non-NHS provided care has remained flat in real terms in recent years.

In the face of this evidence, why do people believe that NHS privatisation is rampant? John Appleby, chief economist of the Nuffield Trust, has suggested that one of the reasons for this is that many of the frontline services which people regularly come into contact with, such as community nursing and health visiting, already have a significant private sector presence. Nonetheless, the public would not regard further outsourcing of public services very favourably since there is a deeply entrenched view that the private sector should not make money out of the suffering of others. In addition, there is a commonly held view on this side of the Atlantic that the US health system fails to adequately look after the less well-off members of society and there is horror in some policy circles at the Trump Administration’s efforts to repeal Obamacare.

Another potential issue is that of opening up the UK market to American pharma companies, with all the attendant consequences for drug pricing. The National Institute for Health and Care Excellence (NICE) measures NHS expenditure to assess the relative cost effectiveness of various treatments against the next best treatment that is currently in use. As a result, the NHS pays significantly less for medicines from American companies than US healthcare providers. The concern is that any trade deal would be used as an excuse to ramp up the prices charged to the NHS. This fear is not unjustified. Alex Azar, Trump’s secretary of health, declared last year that the US would use trade negotiations to demand that “socialised” healthcare systems pay more since they currently pay “unfairly low fees to US companies.” This would allow a reduction in drug costs for US consumers. We should not kid ourselves that Trump’s America First policy will take an altruistic view of healthcare provision to foreign citizens – even those which supposedly enjoy a “special relationship.”

Some prominent Brexit supporters do not have a problem with the outsourcing of NHS services. Nigel Farage has recently been criticised for suggesting that those who can afford private health care should pay for it, as it would "relieve some of the burden on the National Health Service for everyone else." This is not a new position: He was recorded in 2012 suggesting that the NHS should move towards an insurance-based system run by private companies. Another hardline Brexiteer, Daniel Hannan MEP, remarked in 2009 that he “wouldn't wish it [the NHS] on anybody." It’s not exactly man-of-the-people stuff that Brexit supporters are likely to go for.

As it happens, there is a good case to be made for a grown-up debate about how to fund the NHS. But if Brexit is all about taking back control, this debate should be conducted in a cross-party manner and take into account the views of the general public. It should not be forced on the UK government as the result of a trade deal that would benefit the US far more than it would the UK.

The NHS and the Brexit dividend

As we approach the two year anniversary of the EU referendum, it seems that British politicians have learned nothing about the economics of Brexit. Only last weekend, the prime minister herself announced that the government plans to raise the NHS budget by £20bn per annum by 2023, partly funded by a “Brexit dividend.” But like the unicorn and the Loch Ness Monster, there ain’t no such thing as a Brexit dividend.

It is a well-worn story that Leavers promised the UK would have an extra £350 million per week to spend on causes such as the NHS once it leaves the EU. It is an equally well-worn story that the number is a complete fabrication because it reflects the UK’s gross contribution to the EU budget, not the net figure – which is far more relevant. After all, the UK gets roughly half of its gross contribution back in the form of EU funding for domestic projects. Then there is the small matter of the Brexit bill: Assuming that the UK pays a sum of around £40bn to settle outstanding liabilities following EU departure, that is around four years of net contributions up in smoke. Moreover, since Brexit is widely expected to result in slower GDP growth than would otherwise have occurred, there is a strong likelihood that public revenues will be lower than in the absence of a Brexit vote. The OBR’s latest forecast suggests that by fiscal year 2020-21 total revenues will be £27 bn below the projection made in March 2016 (the last official forecast before the referendum, see chart). But even if revenues do somehow match 2016 expectations, the final exit bill means that the UK will be fiscally worse off on a five year view compared to pre-referendum forecasts.

So let’s be clear: There is no Brexit dividend. So why do politicians continue to say such things? Well for one thing, it is a snappy soundbite. Secondly, as this article points out, language shapes the way we think. Thus if a phrase is repeated often enough, it becomes an unconsciously accepted fact no matter how nonsensical it is. Thirdly, there is also a sense that the media increasingly does not hold the government’s misrepresentations to account. The interviewer to whom the prime minister made her claim did not challenge the notion of a “Brexit dividend.”

All that aside, nobody disputes the fact that additional spending on the NHS is welcome. But if there is no “Brexit dividend” where will the money comes from? The PM did suggest that “we as a country will contribute a bit more” which is code for higher taxes. The Institute for Fiscal Studies reckons that raising National Insurance Contributions (NICs) by 1 percentage point could raise around £8.5bn. Freezing personal allowances would raise around £3.5bn. Furthermore, the government is believed to be seriously considering not implementing planned cuts to corporate taxes which, as I pointed out in February 2017, would yield around £7bn. Putting all that together gets us close to the planned £20bn.

Rather than play with existing taxes, there is an increasingly strong argument for a hypothecated tax solely to fund the NHS. The Treasury has long been opposed to hypothecation, partly because revenues have tended not to be linked to individual projects but have instead gone into the general pot. Think of taxes such as the Road Fund Licence, which was initially introduced in the early twentieth century to pay for road construction and maintenance, but it soon became clear that revenue was not growing sufficiently rapidly to meet construction needs. Whilst hypothecation was abandoned in 1936, vehicle owners still have to pay their road tax. An additional objection is that tax revenue tends to be pro-cyclical which might starve the NHS of funds during times of downturn. Thus, if hypothecation is on the table, it would not be possible to use it as the sole source of funding but it could be a useful top-up option.

There is also no reason why the government could not borrow slightly more than planned. Although it unveiled a manifesto commitment to eliminate the deficit by the mid-2020s, there is no reason why it needs to do this. It could run a modest deficit relative to GDP whilst still running down the debt-to-GDP ratio (in simple terms, this is possible depending on the size of the primary balance and the extent to which the rate of nominal GDP growth exceeds the interest rate on outstanding debt). The economic logic of balancing the budget simply escapes me.

One of the standard definitions of economics is the study of the allocation of  scarce resources. Ageing European societies will increasingly have to make choices about how to fund rising demands on the health care system. Countries such as the UK will either have to cut spending on other areas or raise taxes in order to fund healthcare provision. But what is not possible is to use a “Brexit dividend” to pay for it. If it really were that simple, everyone would leave the EU.

Paying the price for good health

The Institute for Fiscal Studies released its annual Green Budget publication earlier this week (here). It is intended as a comprehensive assessment of the challenges facing the UK government as it prepares to unveil its official budget (scheduled this year for 8 March). It is certainly comprehensive – the report extends to 312 pages. However, one thing particularly jumped out at me: In the chapter on health and social spending, the authors showed that over the period 1955-56 to 2015-16, real health spending in the UK grew at an average rate of 4.1% per year whereas over the period 2009-10 to 2014-15, real spending increased by just 1.1% per annum (see chart).

We should keep this in perspective: Under the previous Labour government, real spending increased at a rate of 5.9% per year, so some degree of slowdown was required. Indeed, this huge surge in outlays was designed to raise health spending as a proportion of national income towards the average levels of health spending in other western European countries – a target which was not achieved. On a per capita basis real health spending has remained roughly unchanged since 2010 although the ageing of the population, which raises the share of elderly people, means that the per capita numbers are slightly misleading.

Nonetheless, the government can claim that it has abided by its manifesto commitment to protect the National Health Service from the cuts in other public services. But at a time when the strain on the NHS is greater than ever before, the government (irrespective of political persuasion) is going to have to face up to some uncomfortable truths on the provision of health care. Part of the problem stems from the fact that although health spending has been spared the worst of the cuts, the social welfare bill has been slashed, having fallen by 1% in real terms since 2009-10. Faced with a lack of options, people are being forced to turn to the NHS for help which it is not designed to provide, which in turn impairs its ability to meet its other targets.

Professor Sir Bruce Keogh, medical director of NHS England, highlighted in a newspaper interview two years ago (here) that the lack of local services such as district nurses, beds in community hospitals and mental health support were key factors behind the rising strain on front line health services. It is not as though the government is unaware of the problem. The Times reported in December that Chancellor Philip Hammond wanted to raise the funds allocated to social welfare provision but was overruled by the prime minister. It further suggested that the issues facing social welfare are “a political problem exacerbated by political cynicism,” following the stymying of cross-party efforts to find a solution to the problem by former Chancellor George Osborne before the 2010 election.

On the basis that the NHS in England expects to face a cash shortfall of up to £30bn by 2020, what can be done to plug the hole? Unpalatable though it may sound, a simple option would be to raise taxes. A rise of 1% in the basic rate of income tax would provide £4.5bn of additional revenue by 2019-20, according to the Treasury’s ready reckoner. Bearing in mind that the basic rate today, at 20%, is the lowest in decades (40 years ago it stood at 30% and it was last cut in 2008 from 22%), this is not the worst option. A 2% rise in the higher rate of tax would yield a further £2.0bn. The government could also raise national insurance contributions which are, after all, designed to fund social welfare provision. A 1% rise in employee contributions would raise almost £4.3bn and a similar increase in employer contributions would generate £5.1bn. But the real kicker is the government’s planned cuts in corporation tax rates. Each 1% reduction in the standard rate costs £2.4bn in revenue, and with the government planning to cut the standard rate from 20% today to 17% by 2020, this will cost £7.2bn in revenue. If corporate taxes are left unchanged and the other tax hikes are implemented, this would get us two-thirds of the way towards covering the health spending shortfall.

These are, of course, static calculations. Employers will create fewer jobs if payroll taxes rise which will result in less revenue than these numbers suggest. However, they illustrate that UK governments will at some point have to begin squaring the circle.  The 30 year period during which governments have cut taxes whilst promising world class public services are over.

Nobody likes to pay higher taxes of course (least of all me). Thus the other unspoken possibility is to introduce some form of charges in order to encourage rationing. One option might be to introduce an initial charge for doctor’s visits with subsequent visits incurring no such penalty. The British Medical Association reckons that there are around 340 million consultations per year; over 90% of this contact is with local general practitioners and the average member of the public sees a GP six times a year. Running through the maths, GPs see 51 million different people per year. Imagine that the first GP consultation per year was charged at £10 with subsequent ones free (with suitable exemptions for the very young and the very poor) – which is the equivalent of three pints of beer per year or 12 pints of milk – this would yield £0.5bn per year in user charges.

Whilst this is not a huge amount in the grand scheme of things, it might be the direction in which we are forced to travel. As we all know, demand for health care is near-infinite, and unfortunately we need to find ways to fund this demand as our population ages and the pressure on the system mounts. But are our governments brave enough to face up this unpalatable truth? It certainly won’t win votes but it might help to preserve the health services.

Think healthy

The journalist AA Gill died at the weekend after a short battle with cancer. His final article was published posthumously in the most recent issue of The Sunday Times, describing how he coped with his fatal illness. What was particularly striking about the article (the gist of which you can get from the BBC here or The Guardian here) is the description of how cancer survival rates in the UK are the lowest in western Europe. The doctor who treated him noted that the reasons for such a poor performance are due to “the nature of the health service” which imposes such a huge administrative burden that it hampers early diagnosis of the disease which is so vital to successful treatment.

Many foreign people of my acquaintance do not share the same reverence which the Brits show for the National Health Service. This is in no way to denigrate the professionalism of those who work in it. The doctors, nurses and all other medical staff do a wonderful job saving lives and healing the sick – but they work in a system which is dysfunctional, as many NHS employees readily admit. As Gill himself noted, the Brits lie to themselves about the quality of the service they receive. “We say it’s the envy of the world. It isn’t. We say there’s nothing else like it. There is. We say it’s the best in the West. It’s not. We think it’s the cheapest. It isn’t … You will live longer in France and Germany, get treated faster and more comfortably in Scandinavia.”

When it was founded in 1948, it offered a genuinely revolutionary approach to health provision in the west. But precisely because it is free at the point of consumption, it has always struggled with questions of “how best to organise and manage the service, how to fund it adequately, how to balance the often conflicting demands and expectations of patients, staff and taxpayer [and] how to ensure finite resources are targeted where they are most needed.” (source: Geoffrey Rivett, here). As treatment becomes more expensive and the population gets older the pressure on resources becomes more intense. The current government has opted to ring-fence NHS spending (but not welfare spending – we’ll do that another day) but continues to struggle to reform the system. No politician has yet had the courage to impose charges as a means of regulating near-infinite demand, such is the totemic importance of the NHS to the British electorate.

Precisely because resources are finite, Gill was denied treatment on the NHS which may well have prolonged his life because it was deemed too expensive. The cost of providing him with a drug called Nivomulab would have amounted to between £60k and £100k per year – four times the cost of traditional chemotherapy. And this is where economics comes in. Health economists are employed in the NHS to ensure that best use is made of the resources available. It is a job which needs to be done. After all, if economics is (at least partially) about the study of the allocation of scarce resources, then health issues would appear to be highly amenable to the scrutiny of economists.

But Johannes Bircher at the University of Bern argues that we do not actually know what health is (here) and therefore it is not a commodity which can be priced: After all, we cannot produce, obtain, exchange, sell or store it. Such an approach rather undermines the assumptions underlying Kenneth Arrow’s classic 1963 paper (here) which treats health as a commodity – albeit one with different characteristics to normal consumer goods.

My own issue with the field of health economics stems back to my undergraduate days and questions of cost-benefit analysis, because I have always struggled with the question of how you put a price on life. No matter what form of valuation you use, no amount of money can ever compensate for the very essence of being. This is not a question for economists – it is one for the philosophers. 

All that aside, Gill showed a remarkable degree of stoicism in facing up to his fate and wrote that he was happy for the last 30 years of life, having broken his alcohol dependency cycle in the mid-1980s. For a man who wrote so wittily and so scathingly on a range of subjects, it is only fitting that we leave the last word to him on a subject we all know and love so well – Brexit. “We all know what ‘getting our country back’ means. It’s snorting a line of the most pernicious and debilitating Little English drug, nostalgia. The warm, crumbly, honey-coloured, collective “yesterday” with its fond belief that everything was better back then, that Britain (England, really) is a worse place now than it was at some foggy point in the past where we achieved peak Blighty.”