Cost of the Market Yet Again

Competition and markets

Sadly we have had yet another rounds of claims that £10bn could be saved if the NHS market was removed in England.  Yet again the only basis for the claim is one line in a report from a Health Committee report – in fact misquoting what was actually said.

The claim is that the introduction of the internal market increased NHS administration costs from 5% to 14% of total expenditure; so removing the market will save 9% or around £10b. Sadly this is complete nonsense.

The source for the claims about 5% and 14% is the 4th Report of the Health Committee, Session 09/10 on Commissioning.  The following extracts are from the report…

According to the official historian of the NHS, Dr Charles Webster, the service has traditionally scored highly on account of its low cost of administration, which until the 1980s amounted to about 5% of health-service expenditure.


An estimate of administrative costs made by a team at York University concluded that management and administration salary costs represent, as a very crude approximation, around 23% of NHS staff costs, and around 13.5% of overall NHS expenditure.

Ignoring the figures it is clear that the costs of management and administration in the NHS did rise significantly over the period from the 80’s to the 00’s.  That this was due solely to the internal market is not based on anything at all.

Two things should immediately be pointed out.  The quote about 5% is from an excellent book, A Political History of the NHS by Charles Webster, but the passage in the book does not itself have any references to where the 5% came from or what it actually contained.  It is almost certain that in the era pre 1980 many tasks which might now be characterised as “administration” or “management” were only done as part of a wider job and so would not have been recorded in any way.

And the York University Report – NHS Management and Administration Staffing and Expenditure in a National and International Context, from March 2005, time and again sets out that comparison of costs between countries and between periods in our own NHS are beset with many issues around classification.  So for example the 14% did not include any “estimate” of consultants and others time which might be classed as administration or management.

In fact the report actually put its estimate of administration and management costs on an internationally comparable basis at between 17% and 21% (not the 14% as is often used).

As the report sets out:-

There are no agreed definitions of ‘administration’ and ‘management’ in health care between (and sometimes even within) countries’ health care systems. Substantial ambiguity exists around any comparisons, particularly as definitions shift as groups of workers are recategorised. Consequently, all cross-national and cross-sectoral figures must be viewed with extreme caution.

On every level comparing the 5% and 14% is nonsense.  Even if we had reliable and comparable figures (and we don’t) then arguing the whole of any increase between the cost base in the 80’s and the costs base in 2003 (the base year for the York study) was due to the internal market and that this was wholly without any compensating gains is not justified.

In a paper which uses the same base information Colin Paton suggested that only half of the increase was due to the internal market – although he gave no rationale at all for arriving at the 50% figure.

None of those that claim £10bn can be saved have ever set out where the costs would come out of the system – it equates to many tens of thousands of jobs – so who gets made redundant?  It has to be tens of thousands of jobs as other non-pay expenditure is on nothing like the scale needed to get to £bns.

So these claims are distractions and in fact play into the hands of the conservatives who claim that the NHS does not need more funding it just needs to be more “efficient”.

To get some better idea about what might actually be saved from removing the internal market some insight is provided by some real evidence.  Some real information about the costs of various systems has recently helpfully been provided in a study by Himmelstein et al.  This looks only at the costs of management and administration within larger hospitals across various countries with varying degrees of “market”.  Of particular interest is that it treats Scotland and Wales separately from England in its analysis.

Like the York report it would help if more people actually read what the evidence says, but to summarise: the highest costs per capita (after numerous adjustments) are in those systems with complex payment systems.  Systems which have single payer and block funding have the lowest costs.  Systems like ours in England are in between.  For hospitals the best estimate for England is for administration and management to account for between 17% and 21% of total expenditure.  (Spookily but coincidentally similar to the York finding of a decade ago.)

In comparisons of relative expenditure England comes out slightly higher than Wales but Scotland is significantly lower.  The explanation though appears to be a technical one in that management of capital in Scotland is more centralised.  In fact there is not a lot of difference between the three nations.  What differences there are appear to be due to costs of administration not of management and to be due to numbers of people not wage levels.

But there are differences which can be seen mostly to do with the costs of information used to drive the payments systems, which in England is DRG and activity based plus a bit of block funding.  So if we went back to very simple single payer funding with no competition for funding and centralised all capital management it appears that there could be savings of the order of 1% to 2% in hospital costs.  That is a lot less than £1bn in total even if it were possible.  In fact much of the information used to drive payments systems is used anyway and would be required so nothing like £1bn could be saved.

But in England there are also commissioning costs and system management and regulation costs.  Opinions vary about what we do in terms of planning if there is no market and about how much system management and regulation would still be needed.  But we could envisage savings from the £1.2bn spent by CCGs plus spending on CSUs, and much of the regulatory infrastructure.  Maybe £2bn in all.  But much of what is actually done within these bits of the NHS still has to be done somewhere. We do need to know how much various things cost and how variable outcomes are and we do need someone designing pathways and we do need some kind of oversight.

Anyway nothing even at the wildest extremes of what might be possible gets to savings of even one quarter of the claimed £10bn.  Still the mythical £10bn is so firmly entrenched the facts are unlikely to be of much use.

When the Health & Social Care Act is repealed and the competitive market is removed then there will be scope for savings but not of the order of £10bn.  Further savings could come from reducing the number of NHS organisations through consolidation, but merges and other transactions have a bad track record.  We can only “guesstimate” but this might over time be of the order of 1 – 2% of total English NHS expenditure, but there would be considerable transition costs to be met and neither change would be easy and consolidation would be contested!