NHS taxes and an argument for funding reform

NHS Funding

The UK has a relatively cheap, efficient health system, fairly funded and provided. It also has a cheap, inefficient and deeply unfair social care system. But despite their frugality, the health and care system is entering another financial crisis prompting zombie calls for charges, private insurance and rationing. Whilst avoiding these traps, we should consider whether a progressive funding reform could set the NHS on a more sustainable footing despite the austere climate. In particular, we should look at the options for pre-funding health and care so that future generations of older users and patients can enjoy longevity without the fear of indignity and catastrophic loss.

Health and care are both underfunded compared to the quality of care we expect (including latest drugs but also it appears sufficient numbers of nurses and care workers), and we know the gap between need/ demand/ expectation and resources allocated is growing. Despite ‘brave’ intentions of Nicholson challenge, QIPP and integrated care to bridge this gap, even the combined PowerPoints of McKinsey and Monitor cannot show it can be done, and political meddling and market machinery has made the task impossible in the timeframe.

Meanwhile we have an economic context of debt and deficit, lost growth and weak recovery combined with an apparent mainstream political consensus of pro-austerity media, polls and political parties. A fundamental impasse beckons, threatening the future of these services.

Funding reform proposals tend to be the territory of the right (on the premise that the status quo was designed and defended by the left) which makes discussion amongst progressives difficult to initiate without being condemned as stealth Americanisation. So for the record first let us reject user charges and the insurance market as a realistic source of NHS funding. These tend to punish the sick and inflate total healthcare costs and are fraught with market failures (and ideological and political barriers). Following this logic, let us also reject competing social insurance funds, as these add complexity, reduce equity, are more expensive to run and suffer from similar market failures.

Take it as read that I and probably most readers would support progressive income tax and an alternative to austerity to fund the health and care to which we aspire. Tax funding could be soft-hypothecated, ie a general tax rise justified by a need for NHS funding. It could even be labelled on payslips as “NHS contribution” to obtain (hopefully) public consent. For simplicity this is the preferred option – although it would still have its challenges, not least setting a precedent for separating contributions for popular spending items and thus reducing even further the political acceptability of raising funding for less popular but important government aims like social security, legal aid, asylum support or offender rehabilitation.

But also consider that we might not win this argument either within a party or with the electorate. Therefore some proposals for new NHS taxes are emerging – see IPPR or Frank Field – and the situation for the NHS in the next decade may be so drastic that we need to consider new funding mechanisms to safeguard its future. What might that look like? If we are looking at funding models in the context of a crisis in funding opening up this decade then should we not consider a greater pre-funded insurance-type component rather than exclusively pay-as-you-go funding?

The go-to tax for hypothecated NHS funding is National Insurance, as in 2002. National insurance contributions currently make up a proportion of NHS funding, whereas social care is funded through general taxation (but heavily reliant on user charges and rationing ). Another “hypothecated” rise in NI could bail out the NHS, but would it provide sustainable resources long term? National Insurance is not a pre-funded pot and is a slightly less progressive way than income tax of taxing current workers to fund current spending. Many current pensioners believe, mistakenly, that their stamps have paid into a pot on which they are now able to draw for pensions and care, whereas their NICs really only funded their own parents’ contemporaneous needs, which were more modest in population size, expectation and longevity. Whilst I would not overplay intergenerational conflict, as the biggest inequalities are between classes not ages, there is an argument for managing the burden of the baby-boomers on current working age taxpayers.

There is a clear parallel with pensions policy, where a pay as you go funding model has been overwhelmed by increasing longevity. In the last decade the Pensions Commission set out the choices, and a quiet revolution has been in way with the creation of a publicly run default (opt-out) pension scheme (NEST) established to ensure that future generations will have a pre-funded pot to draw on, rather than over-burdening current working age taxpayers. Labour has previously floated a similar model for funding long term care (see John Healey’s speech at IPPR 2011) which bears strong resemblances with pensions as an ageing-driven cost.

Whilst an asset-levy on retirement or after death should be revived as a source of funding for the baby boomers (allowing them to protect the majority of their children’s inheritance), future generations cannot be relied on to have an unearned housing wealth to tap.

If we support a pre-funded mechanism for pensions, and can see a rationale for long term care, could this approach be extended to healthcare? Certainly healthcare is not purely age-driven (unlike pensions) and services like primary care and maternity services, as well as child and working age health and social care, should rationally be funded by current taxpayers. However a large proportion of health spending is age-related and predictable. We are currently seeing a demographic wave of frail elderly patients, often let down by poor care coordination and social care but often simply very old and acutely sick, requiring intensive treatment often in hospital beds. This is the growth area of NHS costs in the next decades, and the ratio of current taxpayers to elderly patients will decline continue to decline as healthy life expectancy grows less rapidly than longevity. We need to find new ways of sustaining independent old age, staving off acute needs and managing end of life care less wastefully, but it is also likely that the era of declining acute beds is over and we should plan for rising acute costs for the very old. So a pre-funded NHS insurance pot could, in combination with traditional funding streams, be a long term approach to funding elderly health and social care as well as pensions.

In the long term, a pre-funded pot could also create some stability for NHS/ care funding rather than having to re-fight the battle for current tax funding every three years. In the short term, however, it would take a generation for pre-funded assets to accumulate. There is never a good time to introduce a pre-funding model to a pay as you go system and you might argue now is worse than ever. But as growth returns this could be a policy that demonstrates a hyper-prudent approach. To bridge the gap and fund the current generation of middle and old aged who have not pre-funded their care, we might need to go back to the care levy on windfall asset wealth.

There would also be a risk that the pot was raided for current spending, or misinvested. An interesting approach might be to invest funds in NHS capital schemes as an alternative to PFI – or to buy out the current poor value schemes, although that might not be felt to be a sound investment given the record.

To conclude, it is worth noting that many European social insurance systems have shifted towards greater reliance on general taxation to bail out insurance fund deficits, which is a salutary lesson for those who argue to “go for Bismarck”. But it may also indicate that an economically and politically optimal health and care funding model would be a blend of collective funding sources. For the sake of another 65 years of the NHS, and to avoid lurching from crisis to crisis, surely it is time these ideas were debated.

Ideas developed as part of 2008 IPPR report into healthcare funding