Health Care Reform in the U.K.: Managed Care by Another Name?

Not quite. In a politically driven system of management, the inevitable result was that market forces were ignored — to disastrous effect.

STAFFORD, ENGLAND — The experience of health care reform in the U.K.’s National Health System should, if nothing else, help to illuminate (for Americans who are disillusioned with their own system) that pitfalls remain in a politically driven health care system.

One consequence of a system dominated by a government single payer and state-controlled provision of services is that reform largely has to emanate from government itself — virtually guaranteeing that the dominant considerations will be ideological and/or political.

Any consideration of reforms the NHS has enacted over the last 10 years or so needs to take place against a background of two long running, interlinked debates: whether the NHS is economically sustainable as a tax-funded system, and whether the introduction of more private enterprise, market-based thinking, and systems is appropriate and effective in improving cost efficiency, quality, and patient satisfaction.

The NHS’s self-sustainability is very much a live debate, despite the Blair administration’s desire to dampen such talk. Privatization, however, is currently very much on the retreat, with Labour’s denunciation of the previous Conservative government’s experiment with the internal market. Competition has literally become a nonword within the NHS, with phrases such as “managed cooperation” much to the fore.

Some background

In 1990, the Conservative government under Margaret Thatcher introduced an “internal market” in the NHS. Central to this was the separation of purchasers (health authorities and general practitioner fundholders) and providers (hospitals and community services organized into bodies called trusts).

Health authorities (HAs) are responsible for funding all NHS care for a defined geographical area — typically around 300,000 people. General practitioner fundholders are primary care doctors who are given a budget to purchase most elective services and drugs for their patients, the funding coming from HAs.

NHS trusts are self-governing agencies responsible for providing hospital and/or community services. All NHS organizations are public bodies that are separate from local government. They operate as not-for-profit entities in U.S. parlance — indeed while NHS trusts are, in theory, allowed to reinvest surpluses in services, in practice the expectation is that they merely break even — and many are operating with a deficit.

Underlying this reform was a belief that managed competition would provide incentives for the NHS to perform more efficiently and reduce costs.

The latter was a brave assumption, given that a series of much-publicized crises in the late 1980s had highlighted funding problems in the NHS. A review of the NHS, culminating in the internal market reforms, had been the government response. The underlying funding issue was effectively ignored and no account appears to have been made of one of the underlying dynamics of organizations operating in a market — the desire for a bigger piece of the cake (i.e., expansion of their customer base), and the size of the cake that is the object of the competition.

Hence, while an internal market may (or may not) reduce provider-cost bases — and thus average costs would fall — it was still likely that pressure (particularly as public demand for health services outstripped supply) to spend more would grow. This is what actually happened, but whether hospital costs fell per case is arguable; any definitive answer is elusive because of the NHS’s inability to provide accurate information.

Forces of production

Notwithstanding the above, there is little doubt that NHS productivity, measured in discharges and deaths, and particularly in ambulatory procedures, increased dramatically with the introduction of the internal market. The introduction of trusts seemed to provide an organizational focus that liberated the forces of production — aided considerably by contracts that were often essentially piece-rate in nature.

Finally, the conventional wisdom of trust management was that success was best attained through growth that gave a further impetus to hospital-based activity.

For example, for 1993-94 and 1997-98 in Wales, the number of inpatient and ambulatory cases in the NHS rose by 121,200 (17 percent). Similarly, the number of outpatients rose by 80,000 (13 percent). Much of this activity was directed at reducing that perennial NHS issue — the waiting list for treatment. Interestingly, the above seems to illustrate Goodhart’s law that any variable that becomes a policy target immediately changes its behavior.

In any case, despite the extra activity the system claimed to have produced, waiting lists and times have remained stubbornly high. For example, in Wales, overall inpatient and ambulatory case activity rose 4.1 percent from 1998 to 1999, with elective activity increasing 6.7 percent. Yet, waiting lists rose 4.9 percent over the same period.

In England, discernible progress has been made in meeting the government’s election pledge of reducing the case waiting list to 100,000 below the inherited figure (as of November 1999, it was down by about 70,000 cases). However, those waiting more than 13 weeks to see a consultant — to see if they need an operation — has almost doubled since the general election, from 247,510 to 486,600.

Any convincing explanation for this phenomenon needs to highlight its multifactoral nature. Set out below are what I consider to be some of the principal factors:

  • Increased level of referrals;
  • Increase in emergency admissions;
  • Reclassification of cases; and
  • Better recording.

The U.S. reader may be interested to note that the above phenomenon took place within a system that provides no direct economic incentive to physicians in either primary or secondary care to consider the financial impact of increased referrals. Indeed, the model promoted within the Conservative reforms would seem to have invited clinicians and institutions to push costs “downstream.”

The Conservatives heavily promoted general practice fundholding, and by 1996, some 52 percent of all GPs (essentially primary care physicians in U.S. terminology) were fundholders. Fundholding practices were given a budget for most elective surgery (based on their historical spending over the average of two years), which encouraged practices to maximize their referrals in their preparatory year — thereby cementing historical inequities between practices.

There were effectively no economic and few administrative sanctions that health authorities (which had to meet any fundholder deficits from their own budgets) could use to address overspending fundholding practices. In theory, fundholding practices with a history of overspending could be removed from the scheme, but there was considerable political pressure to avoid this (it being important to the Conservative government to be able to declare fundholding a success).

Health authorities still had the responsibility of purchasing all emergency care, a shrinking rump of elective work not covered by the fundholding scheme, and services for those practices that refused to join or were too small to become fundholders. (The government set a minimum practice size, and the fundholding scheme was voluntary.)

Not surprisingly, this had a severely destabilizing effect. For many health authorities (which politicians said would keep local health systems afloat by meeting government targets and operating within a strict cash limit), it was little short of disastrous.

For example, in the health authority I worked for (I was executive director for corporate performance at Dyfed Powys HA before joining After Today Management), over the course of five years, local fundholders accumulated some £5 million of surpluses and £6.7 million of savings.

While this was only around 1 percent of the health authority’s overall budget, it was enough to destabilize the entire local health economy, given that the authority itself was already struggling with a growing deficit.

Stop me if you’ve heard this

Meanwhile, hospitals (trusts) were running into the insurmountable problem of the internal market. Money was supposed to follow the patient. Clinicians were proving as adept in the U.K. as they are in the U.S. in generating demand, but the health care budget remained essentially fixed. Worse, it soon became apparent that the politicians could not handle the political and professional fallout of tackling the “losers” — failing trusts and the overcapacity in some areas relative to the funding available (if not the demand to use it).

In this regard, the internal market worked quite well — as markets, even those as imperfect as in health care, are apt to do — in giving powerful messages about the way providers should be configured. However, this was being fed into what remained, at heart, a politically driven system of management. The net result was that market signals were invariably not acted upon.

This might lead one to conclude that there is an operating maxim — based as much on empirical evidence as on ideological caprice — that in matters pertaining to health care, governments can be counted upon to fudge those issues that threaten their poll rating — thus showing the inherent fallacy of thinking that you can operate a market-driven health economy when government maintains direct ownership of that system.

The Labour government seems no more able — or prepared — to tackle the inefficiencies and capacity issues in the NHS, despite its very public renunciation of the internal market. At the same time, it has repeated the Conservatives’ policy of embarking on a reform process — prompted in part by financial problems being highlighted by the internal market — and resolutely denying that there is anything fundamentally wrong with the NHS’s finances.

Labour claims to have abolished the internal market and replaced it with a system that might be described as “managed cooperation,” in contrast to old-fashioned, Soviet-style command and control. The distinction generates considerable discussion among commentators, as it forms part of Labour’s “Third Way” — an enigmatic social philosophy that, whatever its intellectual rigor, currently enjoys the support of the British electorate in its belief that the Third Way is a genuine bridge between old-style socialism and the reputation for cut-throat capitalism that Thatcherism had in the British psyche.

Interestingly, Labour’s renunciation of the Conservative reforms has not led to dismantlement of one cornerstone of that approach — the separation of the NHS into purchasers (health authorities) and providers (trusts). Rather than being scrapped, the market is being modified, in some ways for the better, in others for the worse. It proposes to maintain the split between buyers and sellers of treatments. The buyers will still decide what to buy and will still be able to switch between sellers.

Labour abolished GP fundholding and set up organizations known as primary care groups (PCGs), in which all GP practices in a defined geographical area are automatically a part. It is intended that PCGs will ultimately be given responsibility for budgets from which they are to purchase hospital services, manage prescribing based on a capitation funding formula, and have responsibility for managing primary care. Two features of this model are worth highlighting:

  • Conceptually, a PCG looks similar to an HMO or IPA that operates under global capitation.
  • Individual practices’ ability to utilize any “savings” generated (from prescribing, etc.) will be affected by how the PCG as a whole performs. Overspending by other practices can nullify savings made by an individual practice.

This is a seismic shift in general practice in the U.K., which has always operated (including under fundholding) as small independent businesses — in effect, as islands. This attempt to corporatize primary care and the accompanying statutory framework for clinical governance together are likely to be the most significant reform for that part of the NHS since its creation in 1945.

The latter is meant to ensure that formal multipractice clinical auditing takes place, and that the decisions of the National Institute for Clinical Effectiveness (NICE) — a newly formed national body that will advise on the efficacy of a variety of treatments, and whose first recommendation to the government was that the drug treatment for flu, Relenza, should not be prescribed on the NHS — are enforced.

The organizational model promoted by Labour has such a strong correlation with HMOs (especially the staff-model HMO) that a number of articles have appeared in the U.K. suggesting that the NHS is moving to a U.S. style “managed care” environment.

On face value, this might make the U.K. an attractive area for U.S. corporate expansion. But in reality, Labour’s ideological antipathy to the private sector, when it comes to a direct challenge to traditional areas of NHS provision, makes such inroads very difficult at the present time.

However, while the current political environment is hostile to the private sector, the overall dynamic of reforms, coupled with growing pressure on a tax-based funding system, means that a public/private mix model is considered by many observers as inevitable. This could come as early as in the next five years (even assuming there will be a second Labour administration), given Labour’s propensity and skill in rebadging Conservative policy.

During that time, the question of the incentive gap (essentially how to motivate staff and patients to act responsibly in use of resources in a system that is free at the point of use) that has plagued the NHS from its inception has to be addressed, as must the associated issue of the management and sharing of risk. In this regard, the experience of the managed care movement in the U.S. is likely to remain relevant.

On both sides of the Atlantic, the general reaction of clinicians (especially physicians) to make them shoulder the burdens of cost and quality management will be crucial. Clinician opposition crosses the Atlantic, but it seems to this author that only a few diehard optimists in the transatlantic clinical community really believe that they will be able to continue or return to the practice of medicine unfettered by budgetary concerns. Also, the public’s reaction to attempts to limit the amount of health care it may consume is crucial to the long-term viability of the NHS.

Suspicious public

The U.K.’s system of health care is seen by many as well designed for the task of health maintenance, but, as in the United States, the public is growing increasingly suspicious that the system is less concerned with maintaining health than restricting costs. Hopefully, U.S. policy makers, senior managers, and clinical leaders will see the wisdom of keeping an eye on developments outside their borders. They may be surprised at what they learn.

Robert Royce held a variety of senior management positions in the National Health Service over 18 years. Last November, he joined the consulting company After Today Management as principal consultant. He is the author of Managed Care Practice and Progress, published by Radcliffe Medical Press.