Reflections on the duties of government and the privatisation of services

This paper aims to analyse the roles of the state through history, and the potential consequences of privatisation of roles previously provided by the state.

The Responsibilities of Governments

The state has traditionally had three major roles in society.

Firstly, the responsibility to ensure security for those it governs from foreign powers (for example by maintaining an army or military building).

Secondly the responsibility to maintain order within its jurisdiction through the policing of law. This has traditionally been achieved through exercising the exclusive right of administering physical punishments.

The third major role of the state is exercising the right to raise resources to execute its two major responsibilities above through taxation. These major roles seem to have been fundamental to states throughout human history, however they are extremely basic building blocks. They apply to the most basic of feudal governments, and when they are not fulfilled the fall of the reigning power seems inevitable either through foreign invasion or internal rebellion. To enforce only these roles, a monarch needs absolute authority and complete control of the states armed forces. Where there is a more equal distribution of power between those who govern and those who are governed states have been required to provide further services.

Extended roles of states

In Europe, the industrial revolution and increasing urbanisation coupled with reformations of church and state resulted in increasingly empowered populations. Through a series of revolutions the populations of Europe in the 18th and 19th centuries made the transition to more democratic rule with increasing enfranchisement of their populations. The above “traditional” roles were further developed through the codification and universalisation of laws (theoretically making law available to the population and ensuring that all levels of society answered to the same system of justice).

Another great influence promoting change, particularly in the UK, was the influence of the utilitarian philosophy promoted by Jeremy Bentham – this promoted the thinking that the duty of state policy was to secure “the greatest happiness for the greatest number”. While today this approach conflicts sharply with theories of social justice, and can be used as an argument for ignoring the needs of minority groups, in its time it was revolutionary thinking, since the majority of policy was dedicated to furthering the ends of a small political elite. These new philosophies and popular uprisings have extended populations demands on their states.

To meet the demands of its population non-authoritarian states have taken on a range of other roles. These can be summarised as the planning and provision of the following;

a. Infrastructure

This is typically infrastructure for the public good. This has major implications for public health as it includes the provision of communal services such as supplies of clean water, removal of waste and sewerage, and options for transport. Where rulers are answerable to their subjects these have been provided either through use of public resources (for example the Ancient Romans construction of the Via Appia in 312BC to enable fast military access to conflict areas) or through personal largess (for example the Roman Emperor Trajan bankrolling the construction of the Via Traiana in 109AD). Provision of infrastructure in modern states includes water, sewerage, electricity, heating, internet, transportation networks and more. While these responsibilities have often been delegated to private providers few democratic governments would survive generalised failures in their provision to the public.

b. Economic Success

The role of the state in regulating the economy has been taken for granted for centuries. Recognition of the role and serious study of its effects emerged in the 18th century, however retrospective analysis has shown the impact of states policies on their economies – for example the flooding of the Ancient Roman labour market with slaves following the conquest of Carthage resulted in a dramatic increase in inequalities as those who relied on manual labour for their income became unemployed and suffered extreme poverty as a result, fuelling political unrest. Ironically this is an area where much debate exists about the real influence a government has over the economic success of its population – however while most observers would recognise that serious economic decline and collapse often occurs as a result of forces beyond the control of governments, Keynsian economic theory has identified the importance of the State’s role in reducing their impact and duration, and many economists argue that greater regulation may help prevent extreme swings in economic fortune.

c. Education

States have increasingly been responsible for the provision of a basic standard of education to their population. In Europe, following the advocacy of public education by Martin Luther, the Prussian State was one of the first in the world to advocate compulsory state funded primary education. While European states now take this for granted, universal provision of primary education has not been achieved and its importance is reflected in it being one of the eight Millennium Development Goals.

d. Health and Social Care

The recognition that disease or infirmity can destroy lives at random has led populations to seek provision of social security that allows care for the sick, elderly or infirm. The Emperor Trajan provided one of the first recorded state funded systems to help the poor. Religions have provided variable assistance for the sick and the poor throughout recorded history (variably aided by the state) however the first example of universal social security occurred when Otto von Bismarck outlined plans for a social insurance programme in Germany to care for those over 70 years of age in 1889. It should be noted that Bismarck (a hard-line conservative) did so to circumvent further concessions to the socialist movements of his time.

e. Emergency planning and response

States have taken various roles in the prevention and recovery from both natural and man-made disasters throughout history. One of the most common disasters to befall pre-industrial economies was famine as a result of crop failure – reserves of grains have been held by the state to alleviate such events since the first recorded histories. Famine has been one of the most common drivers to internal revolution in both ancient and recent times. States have also had to respond to plague and widespread illness to promote the common good. It has only been in the last century that the concept has arisen that the state has a role to play in preparing for and preventing other disasters such as those caused by environmental degradation or consequences of extreme weather or geological events. For much of the late nineteenth and early twentieth century provision of these extended roles of the state occurred through government enablement, with state investment in infrastructure and generally through state controlled provision.

The Role of Privatisation in Reducing the Responsibilities of the State

Proponents of privatisation frequently argue that publicly provided services, being immune to the rules that govern markets, are inherently inefficient. This is often borne out in reality, as the privatisation of certain public functions often results in short term savings. However, there are a number of potential problems with privatisation which must be recognised.

Potential problems with privatisation

Imperfect markets

Economic theory suggests that efficiency is obtained by allowing companies/vendors of services to compete in a perfect market. The characteristics of a perfect market are:

(Near) Infinite buyers and sellers – a large number of purchasers and vendors are required to ensure prices are competitive, and reflect the cost of production plus a “reasonable profit”. It is unlikely that health care in any guise will reach this, for reasons highlighted below.

(Near) Zero entry and exit barriers – it must be simple for providers to enter the market. This is rarely the case for aspects of healthcare, where there are significant barriers either in terms of the costs of setting up (for example the prohibitive costs of building and equipping an operating theatre) or the costs and time involved in training providers (for example the training of a new surgeon will take a decade or more).

These barriers can generally only be lowered in healthcare by reducing margins of safety (for example reducing the requirements for sterile fields in an operating theatre, or reducing the need for qualifications in the surgeon).

Perfect factor mobility – Factors of production include the physical and labour resources required to produce a product. In the long run these factors must be mobile (ie can be adjusted) to allow for changing conditions within the market. Again, while this is sometimes the case in healthcare, the biggest barrier to this is the difficulty in reshaping the labour supply quickly to meet increases in demand – it takes decades to train adequately experienced staff.

Perfect information – Both the vendor and the buyer of services must be aware of what the value to them of a product/service is, and hence of its quality. This inevitably fails in almost all markets for health services. While providers are generally reasonably aware of the cost of supplying a service, buyers often do not know what they need, how much it should cost, or the quality of it – patients generally present to healthcare professionals with a set of symptoms for which they are seeking a treatment that will help the symptoms resolve. They require diagnosis firstly, (which puts them at the mercy of their provider since they will have difficulty verifying this information) and treatment secondly (the need for which they have to accept on faith, and the quality of which they are rarely able to judge). Numerous studies have shown that patients and doctors value different things at the diagnosis stage, with patients placing a high value on communication skills where doctors would value the “correctness” of the diagnosis. Similarly patients often don’t have the information required to judge if a treatment is necessary, and if given treatment they may value the result differently to an expert (for example a patient may judge the quality of their abdominal surgery by the neatness of the final closing stitches, since this is the part that is visible and therefore known to them).

(Near) Zero transaction costs – moving to another provider (or refusing to provide to a certain buyer) should not impart new costs on the buyer/vendor. While on the surface this is possible in healthcare, in reality there are significant costs – A patient wishing to move to a new specialist or doctor is likely to lose continuity of their care – ie a new provider will be unlikely to know the finer details about their case and therefore may fail to take important considerations into account when diagnosing/treating them. Likewise, for a healthcare provider refusing to treat a patient in generally thought to be in contravention of professional ethics and codes of conduct, and may lead to loss of reputation, expulsion from the profession or even imprisonment.

Profit maximization – Vendors aim to sell where marginal costs meet marginal revenue – ie the point at which the most profit can be generated. While this is often achieved in healthcare markets, the outcomes for patients are rarely beneficial and are typically thought to be unfair by society, since this often involves providers focusing on the easier aspects of healthcare provision to the detriment of those whose condition or social circumstance makes their treatment more risky or expensive. This has been noted in practice where medical markets have been partially or wholly privatised – for example a Dutch paper noted the development of a two tier health system following part privatisation where the practice of patient selection (which they termed “cream skimming”) resulted in uncomplicated cases being treated in the for profit private sector while the complicated patients were referred to the public sector. A further risk is that providers are likely to recommend unnecessary treatments when they are personally profitable (as evidenced by the Commonwealth Fund review which demonstrated the unnecessary duplication of services in the US healthcare system).

Homogeneous products – All suppliers must be able to provide an identical (or at least very similar) product. This can often be the case in certain parts of the healthcare system, where medications are similar, or where a procedure is replicable (for example hip replacement, or cataract surgery). It is less certain when a condition is rare or where there is significant controversy over how it would best be treated.

Constant returns to scale – In economics returns to scale define the changes to the amount produced that would be expected when the components of production are changed – These are constant when increasing each of the components of production results in a predictable and relative increase in outputs. This is important because it introduces the idea of economies of scale – the situation where increasing the inputs results in a disproportionately large increase in outputs. This is typically achieved as more people within an organisation are able to be used to capacity. This explains why the natural result of unregulated competition is for very large conglomerates to form, which take advantage of the economies of scale. The problem is that this will inevitably result in barriers to new competitors entering the market and hence restrict the number of potential providers, promoting monopolies. While this is a problem of nearly all markets, it is worse when the economies of scale are larger. This problem affects healthcare in much the same way as any other market, however as we have noted the difficulties in training providers and the degree to which economies of scale are rewarded in healthcare is often greater than in other market places.

No significant Externalities – In economics, the term externality applies to benefits or costs that result from a transaction that do not affect the vendor or purchaser – examples would include the impacts of environmental pollution that result from the production process in an unregulated market (the producer doesn’t have to pay for creating the pollution, and the cost is likely to be borne by the whole of society, not just the person purchasing the product). Similarly an example of a beneficial externality would be the herd immunity conferred by vaccination – I am protected when a sufficient number of other people get vaccinated against diphtheria, yet I have not paid anything for this. Healthcare markets suffer from very significant externalities – employers and the state gain hugely from healthy employees who live long, productive lives (as they make more for fixed training costs, or pay more taxes – this externality is arguably what is being recognised in the UK through state and employer contributions to national insurance). Similarly the costs of failures in healthcare are borne by many, through increased risk of transmission of diseases, consequences of accidents and inattention caused by ill health, increases in crime and economic loss.

This section has demonstrated the characteristics of a perfect market, and why healthcare rarely achieves any of them and almost exclusively fails to achieve all of them. The inevitable consequence of further marketisation of healthcare is a widening of inequalities in health outcomes, as those who can afford private provision flourish while those who are unlucky enough to contract rare and expensive to treat conditions are pauperised by them.

There are however other pitfalls of privatisation that should be considered before claiming that it should be adopted as a method of downsizing the role of the state;

Failure to invest in infrastructure

The privatisation of a range of formerly government run industries resulted in quick profits for the government of the UK and a range of other industrialised country in the 1980’s and early 1990’s. Typically these involved selling control of, or access to large parts of the infrastructure required to deliver services. For example, water companies bought access to the catchments, pipes and sewerage systems, telecommunications companies gained access to the telephone wires and exchanges etc. At the time these moves were seen as hugely beneficial to the public who arguably had access to more providers (and consequently lower prices), while not footing the bill for the infrastructure costs. Unfortunately, the profit driven motivation of the companies that took over these services rarely had the resources or the inclination to invest significantly in the infrastructure they had acquired. The consequence of this lack of investment has taken varying lengths of time to become obvious – in the case of telecommunications in the UK, BT nearly went bankrupt as advances in technology left it behind and the dot-com bubble burst in 2001, despite constant increases in share prices and dividends every year since it had been privatised. The company was left in the wake of its competitors, who had invested heavily in new technology including fibre-optic cable and mobile telephony. In the case of the privatisation of water companies in the UK, the result has been a failure to invest in delivery and sewerage pipes, with shareholders preferring the quick returns of a dividend. Only in recent years has it become apparent that the failure to update the infrastructure (much of it dating back to initial era of investment in infrastructure during the Victorian era) is threatening to leave Britain’s growing population with inadequate clean water supplies, particularly in the South East. The initial profits achieved by government may pale in comparison to the costs of “incentivising” investment in infrastructure, and the resulting cost to the taxpayer is likely to be far greater than the small savings incurred by reduced payments over the last two to three decades. Arguably the initial sale prices fetched were set far too low, as they failed to recognise the true cost of developing the infrastructure in the first place.

False economies for the state (cost of unemployment)

Privatisation of most of these industries was followed in the majority of countries by a series of redundancies in the industry. Typically, but not exclusively these redundancies occurred in the lower paid roles of people who were earning below the average wage. The resulting savings were seen by the companies running the services as “efficiency gains” which should be welcomed by the average taxpayer because they offered access to cheaper services. While this was true, it fails to account for the costs incurred in any welfare state of dealing with the large numbers of unemployed people. Instead of providing a low wage in return for some (arguably inefficient) service, the state now took on the burden of providing unemployment benefits in return for no service at all, while giving away the profitability of the service to private industry. Over and above the cost of paying for unemployment, the state has had to meet the increased costs associated with long term joblessness, being the consequent increases in the rates of petty crime, and the chronic ill-health and societal fragmentation that results when someone is deemed unemployable.

Competition destroying cooperation

Many of the more complex areas of government policy can only be addressed through cooperative action across a range of areas. Introduction of a market model and the private interests of competing companies is highly likely to prevent cooperative working, especially when corporate competitors who would naturally be competing for resources and clients are expected to share commercially sensitive information. Ultimately this results in failure to act on the root causes of problems, making policy ineffectual.

Concluding thoughts

This work tries to define the historic reasons behind the expansion of the roles of the State, making clear the fact that any modern day democratic state will be required to provide these services, or at least ensure their provision, to the vast majority of the population. Furthermore it has highlighted the potential pitfalls of adopting a pathway based on private provision, which is potentially effective for certain sectors in the short term, but which often fails to balance the need for short term profitability and longer term investment in people and infrastructure. In particular reference to healthcare, I have tried to highlight reasons why healthcare is unlikely to achieve adequate provision for consumers in a partially or fully marketised setting. Any government contemplating partial or full privatisation of healthcare in the future should be mindful of these pitfalls.

Dr Jason Horsley Specialty Registrar in Public Health currently in training based in Sheffield