British labour government’s reform of the National Health Service, The

British labour government’s reform of the National Health Service, The

Rowland, David


AS a socialised healthcare system the British National Health Service (NHS) has for the past five decades been underpinned by state ownership of healthcare facilities and funding out of central taxation. In this form the NHS has provided free access to healthcare to the UK population at low cost. The recently elected Labour government plans to radically reform this system. In keeping with its belief that direct state ownership of public facilities is inefficient, the Labour Party is seeking greater involvement of the for-profit sector in both the ownership and the operation of publicly funded healthcare facilities. To this end the Blair government has signalled that NHS bodies must make use of the for-profit sector when commissioning healthcare services (1). Private sector companies will also be brought in to manage publicly owned hospitals. Although this policy is presented by government ministers as simply pragmatic, it is clearly informed by a belief that public ownership and management are an impediment to a dynamic and efficient healthcare system. It is also informed by a belief that the NHS must move towards a more market-based model.

Labour’s presentation of these policy proposals as `non-ideological’ has served to discourage public debate about the changes. There are, however, important issues at stake. Relying on private healthcare companies to provide state-funded healthcare introduces new stakeholders into Britain’s healthcare system with a financial claim on NHS revenues. It will almost certainly lead to an increase in the administrative costs of the NHS and will move healthcare provision further away from democratic control. More importantly the cost of care is likely to increase whilst the quality of care is likely to decline.

Another facet of Labour’s health policy which has been poorly reported by the media is the redefinition of free healthcare which is currently taking place. The Labour government’s rhetorical commitment to healthcare free at the point of use is not matched by the legislation which it passed in the previous Parliament. Under the Health and Social Care Act 2001, nursing and medical care will be funded out of general taxation; however, personal care-which includes such non-medical aspects of care as toileting, feeding, bathing, etc. remains a matter of personal responsibility. The Department of Health has also published guidelines which, for the first time, place a time limit on free NHS care (2). Thus, whilst Labour is committed to funding healthcare out of general taxation, it is also committed to a narrowing of what is defined as free healthcare.

Funding, capacity and managerialism

The problems which face the British NHS are often presented by government as purely systemic. The current belief that private-sector management techniques will transform an ailing service comes on the back of Margaret Thatcher’s New Public Management reforms of the 1990s. However, that the current system is under stress is less the result of outdated management structures and more the result of a shortage in capacity and underfunding. It is estimated that there are around 9,000 unfilled nursing vacancies in the UK (3), whilst the British Medical Association estimates that there is a shortage of around 10,000 General Practitioners (4). The Labour Party in its previous term in government oversaw a reduction in available bed numbers of around 12,000 between 1997 and 2000, continuing a trend which saw the loss of 39,000 acute hospital beds between 1979 and 1997 (5). As a result of this service contraction, most NHS hospitals wards are operating at around 80% occupancy, clear signs of a system under stress.

Can the private sector be used to address the problems with capacity? In its current state the private sector is far too insignificant to make any impact on the bed shortages being experienced across the UK. In total there are around 10,050 private acute hospital beds in the UK (6), in comparison with the 186,000 which exist within the NHS in England. If the Labour government is serious about utilising the spare capacity in private acute hospitals it will need to embark on a much more fundamental review of the relationship between local commissioners of services (Health Authorities and Primary Care Trusts) and the independent sector. Private sector growth will need to be stimulated in some way and firm guarantees of business will need to be offered. This in turn will signify the end of a unified National Health Service and will move the UK healthcare system towards a mixed economy of care underpinned by a myriad of contracts. The Labour government is currently putting into place the structures which will allow this to happen.


Whilst the government is committed to a significant increase in healthcare expenditure over the next four years, it believes that popular support for a free and universal system can only be maintained if additional spending on healthcare is seen to produce visible and speedy results. In harnessing the management expertise associated with the private sector, the government believes that it can increase the levels of efficiency and productivity in the delivery of state-funded healthcare. However, it is far from clear that contracting out services to the private sector will lead to either greater efficiencies or higher productivity. Moving to a healthcare system based on a complex web of contracts will bring about new costs not incurred by the current system. It is important to remember that the NHS as a hierarchical and unified structure has provided a comprehensive free service that is also-according to accumulated OECD data-very cheap by international standards. As a unified structure the NHS has two main virtues in terms of cost containment. It is able to control labour costs by remaining a monopoly purchaser and provider of labour and it operates with very limited transaction costs. A move away from a unified structure to one with a multitude of healthcare providers will almost certainly lead to the incursion of new costs and lead to greater inefficiencies.

Contracting and transaction costs

The transaction costs associated with any contractual agreement are proportional to the complexity of the good being contracted for. Thus contracting for a service such as refuse collection will mean low transaction costs, whilst contracting for healthcare provision will lead to high transaction costs. As one author has noted, “Monitoring consumes resources, the cost of which has to be taken into account in any overall assessment of a quasi-market’s contribution to efficiency” (7). In all international comparisons the NHS has traditionally scored high on account of its low cost of administration, which up until the 1980s accounted for about 5% of health services expenditure. As a hierarchical structure the NHS thus had low administrative and transaction costs. The “internal market” reforms of the 1990s led to the reorganisation of the NHS on the model of the “purchaser– provider split” and was underpinned by a series of contracts for care. These quasi-market reforms led to an increase in administrative costs from 5 % to 12%. The ratio between nurses and administrative staff fell from 3.5:1 in 1981 to 2.5:1 in 1996 (8). Whilst the new agreements with the private sector will be of a significantly different nature from the internal market of the 1990s, it is clear that any further move away from a hierarchical structure to a contract-based model will result in much larger monitoring and administrative costs than are currently found in the NHS.

Significant attention needs to be given to the effect of provider status on the cost of healthcare. In the United States, which has a mixed provision of care provided by public hospitals, for-profit hospitals, and not-for-profit hospitals, administration costs are excessive. Within hospitals alone, about a quarter (26%) of the budgets are spent on administration costs (9). Within private-sector for-profit hospitals, over 34% of the budget is spent on administration costs. In general, overall costs of care were higher at for-profit hospitals. Similar studies in Australia reveal that for overhead costs private hospital costs were 31 % more than public hospital costs (10).

How efficient is the private sector?

It is also far from clear that private sector management of publicly funded hospitals will lead to greater efficiencies. Those services within hospitals in the UK which have been contracted out-laundry, catering, cleaning-provide examples of the private sector managing services formerly provided by the public sector. There has been no evidence put forward to demonstrate that the contracting out of auxiliary services has led to either higher levels of efficiency or higher quality services (11). Perhaps more importantly, the recent naming and shaming of the dirtiest hospitals in Britain revealed that four out of the five trusts which run the ic, dirtiest hospitals employ private contractors to clean their wards (12). In the market for community care in the UK the claim that the private sector is able to deliver higher quality at lower cost has been difficult to substantiate.

The recent experience of private management of public hospitals in Australia shows that the claims of private sector efficiencies have failed to materialise. One study by Duckett and Jackson concluded that in the provision of hospital services “the public sector is technically, allocatively and dynamically more efficient than the private sector” (13). A study by the Centre for Health Program Evaluation in Australia examined the relative cost of care between private and public hospitals. They concluded that “private hospitals may be more likely to employ costly procedures and that the unit costs of such procedures may be significantly greater in the private sector.” The authors also go on to note that “these results imply that the expansion of private hospitals and the privatisation of public hospitals may significantly increase the cost of health care” (14).

Thus a new form of managerialism is unlikely to solve the ills of the NHS. Unless evidence can be put forward to demonstrate that private sector management is more efficient and more likely to deliver much needed reforms, the policy can only be justified with reference to the theoretical assumption that the market works best.

Monitoring the true cost of care

When contracting for complex services such as care services it is often very difficult for public bodies to monitor the true cost of care and to know when a price increase request is in fact justified. The complexity of the contractual arrangements means that there is great scope for private sector contractors to behave opportunistically. The Australian experience of private management of public hospitals has shown that contract prices have been renegotiated upward to meet the demands of the private contractor (15). Public authorities are thus susceptible on the pricing issue. In the UK market for community care it has been reported that those running independent sector care homes have threatened to evict residents if the public authorities do not meet their demands for higher fees (16). There is the worrying possibility that the same is likely to occur if public hospitals are privately managed, particularly at times when the system is under stress. Relying heavily on non-NHS sources of provision leaves the government hostage to the demands of the private sector. As in the case of the privatised railways in the UK, the primary role of public authorities will be to ensure that private healthcare companies stay in business whatever the cost to the public purse.

Labour costs

Ironically, allowing the private sector to employ staff will introduce competitive forces into the labour market which will drive labour cost up rather than down. Private hospitals will have to compete to attract highly qualified staff such as doctors and nurses who are currently in short supply. This will bring about a widening in the dispersion of wages and salaries and probably a rise in their mean levels as well. In the United States hospital wage rates have been found to be higher in competitive than in concentrated labour markets (17,18). One of the major virtues of a unified hierarchical NHS is its ability to control labour costs in a way which competitive labour markets cannot.


In relying on the private sector to redress the shortage in capacity the Labour government is taking a gamble. It is widely acknowledged that the quality of healthcare provision in private acute hospitals is way below that found in NHS hospitals. As the Health Select Committee of the House of Commons found, “the small size of the average private hospital (most have fewer than 100 beds) and the need for it to operate commercially may jeopardize patient safety.” Few private hospitals offer round the clock specialist care whilst most are lacking in resuscitation and other emergency back-up facilities. The Health Select Committee noted that within private hospitals there was an absence of doctors on duty who had taken the Advanced Course in Life Saving Technique. Thus if any postoperative complications develop, the risk of death may be much higher in private hospitals than in the NHS.

The levels of experience and training of clinical staff in private hospitals also give cause for concern. RMOs (Registered Medical Officers) who are placed in charge of patients are usually junior doctors with little specialist training. The same goes for nurses. The need for skilled nursing staff is greater in the private sector than in the NHS since there is less supervision by doctors. But specialist nurses are even rarer than specialist doctors in the private sector. Part of this problem stems from the fact that the private sector does not invest significantly in the training of medical personnel.

When things go wrong in private hospitals it is NHS hospitals which are left to pick up the pieces. Last year, there were around 800,000 elective surgical procedures carried out in the private sector in the UK and there were 141,618 admissions from the private sector into the NHS in England. These data need to be handled with care (they may be incomplete and admissions are not the same as procedures). But they are sufficient to indicate a problem that must be addressed.

Much of what is known about private acute hospitals is anecdotal due to the lack of data collected by the private sector. There is no systematic counterpart to the NHS exercise in clinical audit, whilst the current regulatory framework places no obligations on private hospitals to identify or to investigate significant failures in medical practice. The National Enquiry into Perioperative Deaths in its 1995-6 Report commented on the disappointing response of the private sector to participating in its inquiry.

If the Labour government is to pursue its policy of making greater use of private acute hospitals it should be aware that in its current form the sector lacks many of the skills, staff and equipment to be considered a safe and risk-free addition to publicly owned facilities.


The new arrangements for the delivery of services by the private sector raises important questions about how accountable the “new NHS” will be. The democratic accountability of the NHS to local communities may have always been weak, but the private healthcare sector has been and continues to remain unregulated and outside of political control.

Given that the government wants to establish a much larger private sector in healthcare, the pressure to under-regulate will be considerable. It is essential that public interests prevail over this pressure. Using the private sector to provide services for patients funded by the state means that stringent safeguards need to be put in place. However, so far the government has approached the task of regulating the private sector with kid gloves. The private sector has overwhelming and disproportionate representation on the government’s Better Regulation Taskforce (which covers all aspects of private sector regulation), whilst in the last Parliament the government declared its intention to introduce legislation to reduce regulatory burdens on the private sector (19).

In the healthcare sector the Labour government has busied itself with developing new regulatory bodies and has enacted legislation in the form of the Care Standards Act. The National Care Standards Commission established under this Act will regulate the care of elderly and frail patients in private nursing homes as well as patients within private acute hospitals. Whilst the national standards for private acute hospitals have yet to be published, the regulations for the nursing home sector have been issued by the Department of Health and indicate a laissez-faire attitude to regulating the private healthcare industry. Despite the fact that there is strong evidence to show that low staffing levels are associated with poor quality of care, the 38 national minimum standards for Care Homes for Older People for England contain no requirement for minimum staffing levels (20).

It is also unclear how the public money paid over to private operators will be accounted for. A recent Treasury report into accountability for public expenditure highlights the difficulty of accounting for public funds when state services are provided by the private sector. The report makes clear that even where functions have been devolved to other non-governmental bodies, government must ensure that it has robust mechanisms to safeguard the correct use of public money. A question which the Labour government must answer, is how will public bodies oversee the way in which private companies managing public hospitals spend public money? (21).


During the election campaign the one area of health policy which the Labour Party claimed distinguished itself from the more rightwing Conservative party was its commitment to maintaining healthcare provided free at the point of delivery. In the 2000 NHS Plan the previous Labour government ruled out the introduction of user charges on the basis that they were inequitable. However, beyond the election rhetoric of government ministers and party spin doctors, a move away from universal free healthcare has already taken place.

In the UK free NHS care has become increasingly restricted to the most sick and healthcare dependent patients. Those patients who have long term care needs such as geriatrics, are catered for outside of the NHS by local authorities. Under the care of local authorities those who have sufficient resources must pay for their accommodation and those elements of care deemed to be personal care. In 1999 the Labour government established a Royal Commission to investigate the funding arrangements for those receiving non-NHS care. The Commission reported that, whilst patients receiving care under local authority control should still contribute to their accommodation costs, all other aspects of care should be provided free as in the NHS. The Labour government rejected this recommendation on the basis of cost and instead enacted legislation in 2001 to make personal care a matter of individual financial responsibility although nursing care will remain free of charge.

Whilst many government ministers maintain that this reform does not alter the responsibilities of those receiving care outside of NHS institutions, this argument masks the fact that the government is committed to providing increasing amounts of care in non-NHS settings. In order to relieve the pressure on the acute hospital sector a new intermediate care sector is being developed “to ease the transition from hospital to home.” It will consist of around 5000 beds in non-NHS settings such as private nursing homes, and will be used in the main to aid those who are recuperating. However, the state will only have responsibility for funding patients in this category for the first six weeks of care. After this point any patient who has sufficient resources will become responsible for funding both accommodation costs and any costs associated with feeding, toileting, and bathing. Most health professionals believe that a distinction between personal care and nursing care is unworkable (when for instance does being bathed count as free “nursing care” or charged for “personal care”?). However, it provides the cash-limited bodies which are to commission this care (Care Trusts) with a financial incentive to classify as much of a patient’s care as personal care, and to thus generate income via user charges.

The subtlety of this policy reform has allowed the Labour government to insist that healthcare will be paid for out of central taxation but at the same time to redraw the boundaries of where the state’s responsibility for funding healthcare lies.


The recently elected Labour government has signalled its intention to engage in wholesale reform of the NHS. Its faith in the private sector to increase capacity and to deliver cost-effective healthcare is part of a dogma which sees direct state provision as inefficient and outdated. However, in seeing private-sector management expertise as the solution to the ills of the NHS, the Labour government is pursuing a high risk strategy. As the US experience shows, there is little evidence to show that privately run public hospitals are any more efficient than publicly run hospitals, whilst there is significant evidence to show that the profit motive adversely affects the quality of care in hospitals. By dressing up the reforms in the language of pragmatism, the “nonideological” rhetoric of Labour’s politicians disguises the extent to which the founding principles of the NHS are under attack. A universal and comprehensive healthcare system based on need and planning for needs rather than ability to pay is being replaced by one in which certain aspects of healthcare are now the financial responsibility of the individual. Healthcare providers in Britain will become answerable to their shareholders rather than to the local community. If the Labour government goes ahead with these ill-thought-out reforms it is likely that the NHS will lose its ability to deliver universal free healthcare at low cost. As in the US, care will increasingly become a personal responsibility and not a right.


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The recent general election in Britain saw healthcare as the dominant issue amongst voters. The victorious Labour Party responded to this concern with a set of reforms designed to introduce greater private-sector involvement in the delivery of healthcare. These reforms are ill-thought-out. The standard of care in British private hospitals is below that found in public hospitals, whilst new contracting arrangements are likely to increase the administration costs within the system. Faith in private-sector management techniques is misplaced at a time when the real problem facing the NHS is that of capacity. The Labour Party is also committed to redefining some aspects of healthcare as a personal responsibility and not a right, moving Britain towards a more market-based healthcare system.

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