By Ayan Banerjee
Before the NHS was formed in 1948, choices for health care were clearly recognised by the public. People had to make the judgements on which occasions they could afford to seek medical care as well as situations where they could not afford to do without it. However, with the introduction of the NHS, the need for choices did not disappear but became ‘obscured’ by several factors (Mooney, et al., 1986). The majority of health care services had now become ‘zero-priced’ at the point of consumption. By fully nationalising health care, the government at the time aimed to gradually erode the stock of ill health, increasing the health of the population and reducing demand for health care. Thus, gradually diminishing the proportion of gross national product used for funding the NHS (Mooney, et al., 1986). However, this initial expectation w§as gradually eroded by its unfortunate legacy; spending as a percentage of GDP had increased from 3.5% to roughly 7% between 1949 and 2019 (The Health Foundation, 2019). Furthermore, in the past decade waiting times on key services such as A&E and cancer treatments have increased steadily (Thorlby, et al., 2019). Consequently, economists and policymakers are considering a shift in the way that health care is supplied to a ‘social insurance system’ similar to those in operation in Germany and France. This article will investigate and evaluate this alternative means of supply by comparing its differing key characteristics to the NHS. We will then compare the overall systems on efficiency, equity and choice grounds. Finally, we will conclude whether it is in fact time for the UK to move to a ‘social insurance system’.
Characteristics of a ‘social insurance system’:
This article will consider a ‘social insurance system’ to consist of Social Health Insurance (SHI) characterised by the following four points:
Germany’s Health Care System
SHI has its historical roots in Europe dating to pioneering legislation for a system of compulsory national health insurance in Germany in 1883 (Folland, et al., 2017, p. 541). At present, Germany serves as the most appropriate example of an SHI system that the UK may transition to. Its government stipulates universal coverage over a range of different plans, with worker and union groups forming the backbone of the supply of such plans (Phelps, 2003, p. 561). Most commonly used services are included in coverage provided by competing, not-for-profit, non-governmental health insurance funds called “sickness funds” (Thomson, et al., 2013, p. 57)
Fees are negotiated with providers which acts as the major cost control. Numerous government subsidies supply the governmental parts of these programs, which are financed through income and wage taxes. All employed citizens (and other groups such as pensioners) earning less than €4,350 per month are mandatorily covered by government insurance (Thomson, et al., 2013, p. 57). Additionally, obligatory employer payments as well as individual contributions form an important part of the financing scheme with total contributions averaging almost 13% of a worker’s salary (Phelps, 2003, p. 561). Unemployed individuals have their premiums paid by the federal unemployment insurance fund, while the self-employed must pay the entire contribution themselves. Retirees’ pension plans pay mandatory insurance premiums equalling the national average payroll contribution. Roughly 11% of the population opts in for private health insurance that provides supplementary coverage which is costed through risk-related coverage charges (Thomson, et al., 2013).
Germany’s Health Care system will be compared with the NHS throughout this article in the hope of revealing where their differences may be advantageous or disadvantageous.
The economic logic behind this idea centres on the idea that each citizen derives utility from other citizens’ ability to consume medical care. Therefore, making collective demand for the good exceed the total private demand determining it as a merit good (Phelps, 2003, p. 550). Furthermore, some economists argue that those without insurance act as free riders on a health care system that would provide health care to persons who ‘show up at the door’, especially at A&E rooms. By stipulating universal coverage, every citizen is insured automatically which eliminates these free riders.
Conversely, assuming that the UK would transition to a Germany-style SHI system, there would still exist free riders comprising of the unemployed, who do not pay taxes that entirely fund their health care. However, since this issue exists in both systems, it is not especially pertinent in considering this specific transition.
The NHS is characterised by offering health care to all individuals in the UK, therefore a move to a universal coverage system does not compromise the benefits detailed above. However, there are some new benefits from compulsory insurance over the NHS. If all citizens pay an average income-proportional premium, there could be no efficiency loss (Barr, 2004, p. 285). Where insurance is compulsory, it may be possible to pool high and low risks and charge everyone the average premium since low-risk individuals cannot opt-out of insurance. Consequently, low-risk groups pay an actuarial premium plus an unavoidable lump-sum tax, and the high-risk groups pay this actuarial premium and receive a lump-sum transfer. Therefore, a system of universal coverage insurance is not susceptible to the problems associated with adverse selection. Conversely, it may cause inefficiencies through standard policies not allowing for differences in preferences, however, a system like Germany’s offers around 105 ‘sickness funds’ providing a range of choices (Krankenkassen Deutschland, 2021).
Health care costs are paid in a 50/50 share between employees and employers in Germany. This disproportionately affects the self-employed who are required to pay the full costs. Therefore, the additional costs act as a disincentive to self-employment, an often-necessary stage of setting up new businesses or entrepreneurial ventures. Consequently, a universal coverage insurance system may act as a frictional force against enterprise and new venture creation.
Overall, a system of universal coverage is likely to cause little direct inefficiencies with regards to insurance markets, however, this does not mean that the entire system of SHI is more efficient as the NHS (explored further on in the article) (Barr, 2004, p. 115). Additionally, a system similar to Germany’s may affect enterprise.
Co-payment & its ramifications
Co-payment was introduced in Germany in the 1990s to prevent the overutilisation of the health care service. With increasing waiting times and high levels of pressure on the NHS, some economists argue that introducing co-payment will reduce overall waiting times and lower total health care costs. It is hypothesised that this occurs through reducing the use of consultations with general practitioners, specialists, and ambulatory care (Kill & Houlberg, 2014). In Germany, co-payments are limited to 2% of a family’s gross annual income and 1% for chronically ill patients. Since their introduction, the average length of a hospital stay has decreased from 14 days to 9 (Hess, 2005), therefore, reducing the cost per patient.
Whilst co-payments do exist in the UK in the form of prescription charges, a move to a system with greater co-payment may help alleviate some of the costs especially with regards to time spent in hospital. However, studies suggest co-payments have no significant effects on the prevalence of hospitalisations implying that it only shifts costs from insurers to consumers of health care (Kill & Houlberg, p. 825). Furthermore, empirical evidence indicates that vulnerable and low-income groups reduce their use relatively more than other population groups (Louckx, 2002). Therefore, its introduction would require the exemption of certain demographics, however, this is likely to lead to arbitrary dividing lines (Kill & Houlberg, p. 825). This will also incur additional administrative costs especially if efforts are made to preserve equity.
Additionally, exempting groups from co-payments would create added heterogeneity in contributions to public healthcare services. This may reduce support for a public system in the long run, as net contributors may see it as unfair. Furthermore, it is predicted that the availability of supplementary private health insurance (what is available in Germany) counters any desirable demand effects through lowering the price paid by the consumer (Kill & Houlberg, p. 825).
Overall, introducing co-payments forces some key economic and political trade-offs meaning policymakers must carefully consider what their goals are before its implementation.
Increasing choice in relation to medical practitioners and facilities
In Germany, individuals have free choice in GPs, hospitals (if referred), and specialists unlike in the UK. Registration is not required with a primary care physician meaning GPs have no formal ‘gatekeeping’ function (Thomson, et al., p. 59). In the UK, legislative changes in 1991 allowed larger GP practices to become fundholders permitting them to buy certain types of care for their patients (Barr, p. 287). This meant GP surgeries (purchasers) became separated from their providers (hospitals), leading to consumers having their choices made on behalf of them by an agent (GP or District Health Authority). This also created a degree of geographical heterogeneity in the quality of health care available. Therefore, an SHI system would allow for greater levels of choice directly for the consumer.
This can be beneficial as it greatly mitigates the risk of situations where an allocated GP fails to diagnose conditions. By no longer having the gatekeeping function, that GPs serve in the NHS, there would likely be fewer levels of missed diagnoses as a result of non-referrals. Additionally, this would increase competition between hospitals and GPs, therefore, improving internal efficiency (Barr, p. 287). However, there would also likely be a significant increase in costs for the NHS as having more hospital admissions/referrals is a major cost driver. Furthermore, the supply of specialised doctors is considerably inelastic due to the number of years required and difficulties of training specialists. Therefore, a shift to a system that places less importance on GPs would take decades to be enacted making it mostly impractical in the short run.
Additional to choices of medical practitioners, increased choices in relation to facilities affects the quality of healthcare. Similar to with practitioners, a greater choice between mutually exclusive facilities could increase efficiency on the supply side. Legislation could be introduced allowing all hospitals in the UK to be self-governing trusts, essentially creating a quasi-market within the NHS. These markets would still rely on public funding but decentralise demand and supply (Barr, p. 287). This introduces competition on the supply side whilst still not having profit-maximising firms. Consumers can be seen to have a form of voucher instead of spending cash and therefore have greater choice in facilities and practitioners. It is important to note that if medical providers do not face the costs of their decisions, there would be no incentive for productive efficiency.
Conversely, downward cost pressures may negatively affect the quality of healthcare, which imperfectly informed consumers would be unable to recognise. Therefore, for quasi-markets to be beneficial in the supply of health care, quality must be carefully monitored by government which can be difficult with regards to health outcomes (Barr, 2004). There would also be incentives for independent trusts to ‘weed out’ costly patients essentially cream skimming (Barr, 2004).
The argument for public providers to be inefficient stems from them not being profit-driven, however, many suppliers in quasi-markets would not be profit-maximisers casting some doubt on the validity of the theory.
For more variation in relation to facilities there would likely have to be the privatisation of certain health care suppliers similar to in Germany. However, this may create upward cost pressures. The costs of setting up the infrastructure for efficient markets and additional costs used for advertising and increasing providers’ market shares would increase overall costs of provision (Le Grand, 1991). Furthermore, a switch from a monopolistic provider may bring about increased labour and other input costs due to the reduced effect of economies of scale. On the other hand, it can be argued that advertising creates more informed customers and thus more efficient decisions although this would be difficult to assess (Le Grand, 1991).
Germany does have quasi-markets for the provision of health care and different public and private insurance providers compete for customers. Therefore, Germany still serves as a relevant comparison tool.
Overall, greater choice in relation to medical practitioners and facilities would have a significant impact on efficiency. Many argue that by creating more competition through the introduction of quasi-markets, it will drive down costs and ultimately provide better overall health care. However, the likely ramifications on quality and possibly efficiency make a shift quasi-markets exceedingly difficult to judge as beneficial.
Efficiency and Equity comparison
Germany’s SHI has the key characteristics of ‘social insurance system’ being considered in this article, therefore it serves as the most appropriate comparison tool for relating SHI to the NHS. Metrics that can be used for evaluating the relative efficiency and equity of the two systems would be:
The first two points are indicators for efficiency in the use of resources whilst Point 3 assesses health status. Health coverage is not a relevant parameter as SHI and the NHS have universal coverage.
Both countries have the same life expectancy at birth of 81 years (The World Bank, 2018)therefore, there is not a significant difference in health status. The UK has significantly lower health expenditure per capita, 21.1% lower than Germany’s (The World Bank, 2018). Additionally, the UK’s health expenditure as a percentage of GDP is 1.43% lower than Germany’s (The World Bank, 2018). Although far more data is required to make accurate judgements over differences in quality of healthcare (which is beyond the scope of this article), having the same life expectancy suggests there is not a large disparity. More notably, the UK’s health care seems to be significantly more cost effective than Germany’s.
Overall, a brief look into the empirical data illustrates no significant disparity in the quality of healthcare between Germany and the UK. Additionally, the UK’s health service is more cost effective.
A move to a ‘social insurance system’ would mark a vast change in the way that health care is supplied in the UK. Many argue that the NHS is a compromise between the legacies of history, current medical and social values (Mooney, et al., p. 123). However, would a shift to an SHI system be an improvement over the NHS in the UK? Undeniably SHI brings greater levels of individual choice, however, in a market of health care characterised by widespread asymmetric information between providers and consumers this would likely bring more issues than benefits. Universal coverage mostly maintains equity in terms of healthcare and is unlikely to directly cause inefficiencies. Greater co-payment would likely have more negative effects than beneficial ones mainly due to additional costs and the disproportionate effect on low-income and vulnerable groups. Whilst increasing choice in practitioners and facilities may improve efficiency through the increased competition from quasi-markets, however, its expected ramifications on quality and potentially cost-effectiveness make its successful implementation uncertain. Empirical evidence suggests that the NHS is more cost effective and efficient than the German SHI system with a mostly similar quality of health care. Therefore, I believe that it is not ‘time’ for the UK to move to a ‘social insurance system’ as its suggested improvements are obscured by the uncertainty of its positive effects and likely ramifications. No system of health care is perfect, however, the NHS with the right reforms has the potential to be the least inefficient and inequitable form of organisation.
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