Introduction

One result of the reforms pursued by governments across the world to reduce public expenditure deficits since the 2008 financial crisis has been a growing interest in outsourcing the funding and delivery of welfare services. In the UK context, austerity measures and the demand for greater policy innovation have been strongly associated with the application of market incentives and business principles to social welfare provision. For example, the UK Cabinet Office's Green Paper Modernising Commissioning (Cabinet Office, 2010) reaffirmed the government’s commitment to extending payment by results (PbR) mechanisms across public services. The UK government has declared that ‘new forms of commissioning and contracting … improve both the outcomes derived from delivery of public services and the value for money achieved by public expenditure’ (Cabinet Office, 2013a).

Social Impact Bonds (SIBs) are the most recent example of this policy trend. According to their supporters, ‘SIBs offer an answer to a question all policy makers are facing in these difficult fiscal times: How do we keep innovating and investing in promising new solutions when we can’t even afford to pay for everything we are currently doing?’ (Azemati, et al 2013, p 24). SIBs harness private investment to finance innovative welfare services, and the strength of the UK government's interest in them is testified to in its creation of a Centre for Social Impact Bonds within the Cabinet Office and the establishment of a £20 million Social Outcomes Fund designed to support the development of PbR methods and SIBs (Cabinet Office, 2013b). However, interest in SIBs is international – they are currently being considered or developed in the US, Canada, New Zealand, Australia, Columbia, India, Ireland and Israel in relation to a wide range of policy areas, including reducing offending and recidivism, tackling homelessness, employability and active labour market measures and provision of early years education (Robinson, 2012). The possibility of extending the SIBs model to create Development Impact Bonds to fund social and medical programmes in the developing world has also been proposed (Rosenberg, 2013).

SIBs are certainly an interesting idea, but they are also a significant innovation in how social welfare services are funded and provided.

Introduction

One of the first questions a reader might ask at the end of Chapter Two is, “Given these apparently quite sensible arguments about market failure in health care, why then do many governments still operate a system of charging people for care at the point of use?” This would indeed appear, on the face of it, to be an apparent contradiction to the points made in Chapter Two. However, such user charges are often inherited or are nominal, having been introduced by governments as a political mechanism to make it look as though those who are using (and often portrayed as ‘abusing’) the system are being made to pay for it out of their own pockets as well as being subsidised by the wonderful taxpayer. Therefore, as examples, charges tend to be levied on items such as prescription drugs and visits to family doctors. Of course, it is never those wonderful taxpayers, to whom governments are trying to appeal, who are portrayed as abusing the system; it is always some other person. It is important to lay out the arguments against user charges so as to dismiss this as a way forward in getting maximum value from health care.

Every country has a different way of implementing user charges, but, as has been pointed out, a common feature is that they really do represent a minor source of revenue for health care funding (less than 10% in most countries), despite the attention they attract. The real question, then, is why not user charges? More precisely, what are the arguments against their more widespread use? Regular fiscal pressures in most countries lead to frequent debates about extending the implementation of user charges, and the health care credit crunch will be no exception. However, user charges will not save our publicly funded systems, and indeed will act to undermine them. There is much evidence to support this argument, and there is virtually unanimous agreement about it among the experts. Yet, politicians, and the occasional clinician, keep coming up with user charges as a suggested cure for health care ills. I am not sure we can stop this, but the arguments contained in this chapter might help.

Governments around the world are always having to think about how much to spend on the health of their population and what priority to place on different ways of improving health.

One way of helping them to do this is to ask members of the public about how much they personally value different types of health improvement.

This is what we want to do with you in this questionnaire. Imagine that your health service is as efficient as it can be and that to buy ‘extra health’ you would have to pay out of your own pocket; you can even think of this as some form of taxation if you wish.

In this version of the questionnaire, we will ask you to make some assumptions about your age (you are a 40-year-old) and how long you might live, and also to assume you are in full health. In the online version of the questionnaire, we ask you to state your actual age, estimate how long you will live and to rate your health status and we then base the questions on these responses. So, the questions in the online form are tailored to you and are thus more realistic.

What follows is the slightly less realistic form of the questionnaire. On average, most people can expect to live for 80 years.

If we equate 0 with ‘being dead’ and 1 to being in ‘full health’, if people were to live each of these 80 years in the best of health for all ages, we would expect your 80 years to look like this:

For you, as a 40-year-old, this would mean that, if you live the rest of your life in full health, your remaining 40 years would look like this:

• 1. Now, imagine that, in one year’s time, rather than living the next four years in full health, you will experience an illness that reduces your health to 75% (or 0.75) of full health, after which you will return to full health for the remaining years of your life. This is illustrated in this next diagram, where your ‘loss’ in health is shown by the dark-shaded area.

Introduction

In the UK, the National Health Service (NHS) has survived beyond its 60th birthday. Should we celebrate? Of course, there are lots of reasons as to why there is an NHS in the UK, as well as Medicare systems in Canada and Australia and similar such schemes in other advanced economies (with the exception of the US). However, this chapter focuses on the economic, as opposed to the moral or political, arguments. Although they stem from the discipline of economics, these arguments are just that – arguments. Nevertheless, while they may be contentious to some, it is fair to say that most health economists would subscribe to them.

Health care as a ‘commodity’

As explained in the introductory chapter, to take our line of reasoning forward, it is necessary to suspend belief and think of health care as a ‘commodity’. A commodity is essentially an item that can be exchanged in the marketplace; in other words, it is something for which there is both a demand and a supply, each of which will interact to determine the optimal amount produced. Although this notion is anathema to many, it is vital to the case for significant government intervention in the health care ‘market’, allowing us to strip humanitarian and political arguments from the debate. To illustrate, one could argue that it is more of a fundamental human right to have access to food than health care. But why do we not have a National Food Service? Governments intervene in the food market to maintain production standards, providing income supplements where necessary. Such intervention is nowhere near as pervasive as in health care; the rest is left to the market. Make no mistake, if governments could do this for health care, they would.

The fact is that government intervention in health care is a global phenomenon – borrowing data from the table in Chapter One, see the selected examples of proportions of health care spending coming from the public purse in Table 2.1. The story we have to articulate is why this is the case. It is the nature of the commodity we call ‘health care’ that provides the explanation.

More particularly, health economists make the case for extensive government intervention on the basis of ‘market failure’.

Introduction

How can life and health be valued in monetary terms? Abhorrent though this may seem, life and health are evaluated in this way every day when decisions are made about what resources to allocate to health services, and within these services, how much to allocate to different programmes of care, and, even at the level of patient care, when decisions are made about who to treat, who not to treat or who has to wait. Two areas within the public sector that have made significant progress in developing evaluation methods are health and safety, especially transport safety. Environmental economics is also at the forefront of the development and application of evaluation methods. However, the strong links between health and safety with respect to their impact on life-saving and quality-of-life improvements make them a useful focus for this chapter.

The aims of the chapter, therefore, are to reflect current state-of-the-art in estimating monetary values for health and safety, and to suggest important next steps for research in these fields and how you as a reader may want to participate. The focus will initially be on health, because it is in this area that much recent debate has occurred about the need for monetary evaluation. It would seem natural then to move on to safety, this being an environment in which monetary evaluation appears to be acceptable up to a point (albeit still controversial). Lessons learned from experiences in these fields lead us to a discussion of the extent to which methods and results in one area can be brought together with those from the other and, indeed, more broadly across the public sector, so setting a research agenda as to how this might be achieved. Your participation would involve answering some of the weird and wonderful questions economists ask of people when conducting surveys aimed at putting a value on life or health.

Quality adjusted life years and willingness to pay

The issue of evaluating health in monetary terms has recently come to the fore internationally as a result of the creation of health technology assessment (HTA) agencies in several countries. In offering guidance to the health care systems in which they reside about the uptake (or maintenance) of health interventions, such agencies weigh up the costs and benefits involved.

Thirty years ago, those interested in the economics of health and health care were confined to the groves of academia. Snubbed by general economists, health economists were regarded as little more than upstarts with nothing relevant or interesting to say. And they were regarded by clinicians as unnecessary and irrelevant. How the world has changed.

Every country in the world is facing demands for increased expenditure at a time when resources are finite. Every country is seeking to restrain health care expenditure as the prices of new technologies – many with significant advantages – are increasing year on year. Clinicians can no longer ignore the economic cost of providing for all the health care needs of their patients. As the late (and very great) Sir George Godber – Chief Medical Officer of England from 1960 to 1973 – once famously said, “When a doctor sees a patient in his consulting room he must also remember those in the waiting room.”

In this book Cam Donaldson provides an insight into the economics of health care that is accessible to non-experts including clinicians. He starts with a critical examination of some of the diverse approaches that developed countries have taken to financing health care, public versus private provision and the impact of charges. He pays considerable attention to ‘programme budgeting and marginal analysis’ as well as to formal methods of economic evaluation including the quality adjusted life year measure. All this with hardly a single mathematical formula.

This book will appeal to those lacking any formal training in health economics. I commend it, particularly, to those like me who can hardly understand their bank statements let alone their income tax forms. And for tomorrow’s health professionals, it is a must. They are going to struggle, throughout their professional lives, if they cannot get to grips with the realities of the modern world.

Sir Michael Rawlins

London, June 2010

Introduction

The ‘sustainability’ question is frequently raised within the context of our publicly funded health care systems, and more and more new research directions are being taken to inform such a question. All clinical and public health areas need to seriously consider focusing on economic evaluation. This is the generic term for more commonly known methods of cost-effectiveness analysis (CEA) and cost-benefit analysis (CBA) and is based on the same principles as programme budgeting and marginal analysis.

Economic evaluation, in the formal sense described here, is now an accepted method of appraising health care programmes more generally. However, its use in evaluating interventions in many areas of clinical care is still rare, as my experience of writing introductory articles on economic evaluation for clinical journals specialising in different areas of clinical practice has shown. In one recent article, written with colleagues Jim Rankin and Helen Mason (Donaldson et al, 2007), a literature search of the CINAHL (1982-2006), MEDLINE (1966-2006), EMBASE (1980-2006) and Healthstar (1966-2006) electronic databases using the key search terms economic evaluation, nurs$ and orthop$ revealed only two studies. There was no indication in either study of a particularly sophisticated approach to economic evaluation and neither study related to orthopaedic nursing practice per se. The same is true of economic evaluation relating to liver disease, another area I have studied recently. It has to be said that this is a shocking state of affairs for two areas of care aimed at treating very common conditions. One reason for the lack of formal economic evaluation in the literature may be due to the lack of understanding of basic principles involved in doing this type of research. This chapter tries to rectify the situation to some extent, as well as demonstrating (if Chapter Five did not succeed) that application of the basic principles of economic evaluation in health care is entirely ethical, and, indeed, that failing to apply these principles is both unprofessional and unethical.

We will not dwell on these principles for long; they are the same as those outlined in Chapter Five, which discussed the constant, and natural, tension between what the public purse can afford and what people would like health services to do, health economic evaluation being about how scarce health care resources are used to produce the greatest benefit to the community.

Introduction

This is the most embarrassing chapter of the book, for two reasons: it involves me ranting in a rather negative manner; and, then, what I propose as a potential way forward is in fact really quite mundane, despite its impeccable logic. My starting point is that, as a consequence of market failure, the allocation of health care funds according to geographically defined populations, and usually adjusted for measures of need, is now the norm in the most advanced economies of the world – the basic notion of which is a fixed funding envelope that can never meet all possible claims made on it. You will recall that scarcity in the health care context refers to not having enough resources to meet all needs; the situation described above is therefore an example of scarcity. The fundamental challenge of managing scarce health care resources for maximum population health still exists, but seems to be consistently denied by the actions of those who govern and administer our health care systems. Hence my rant begins, with the logic as follows. First, let us rule out user charges and related tools for rationing care that place financial and decision burdens on patients. Second, although sensible structures and incentives are needed, all the fiddling about with these aspects over the past 20 years has not really got us very far. Hello! In a cash-limited system, as is the case for health care in most advanced economies, whatever entities are put in place as a result of health care reform, they all have to manage scarcity.

The problem is that governments have not responded well to scarcity. Indeed, it could be argued that the reforms discussed in Chapter Four represent a form of scarcity denial. In response to health care ‘crises’, it is easier to keep reorganising the system rather than face up to the hard choices that need to be made once scarcity is recognised. The result is that health care systems frequently end up in financial crisis, followed by severe and arbitrary cutbacks to clinical care that go too far in the opposite direction and lead to embarrassing surpluses; ‘boom and bust’ abounds.

The market is coming. Despite the gross and widespread failure of markets to deliver on societies’ needs in recent years, the ironic consequence will be the reduced ability of governments to invest in public services. Governments are already spending public money in new ways, shoring up the banks and other parts of the private sector. This will lead to a claimed lack of ability to keep health services public, and the perfect opportunity for advocates of market forces and deregulation in health care to pounce. A gradual privatisation of health care has been taking place in some major economies of the world already. This is illustrated in Table 1.1. Although for 14 of 27 countries listed in the table the proportion of health care expenditures coming from the public purse has either been maintained or has increased over a period of almost 20 years, for the most advanced economies in this group, any increases are slight. As ever, the US is an exception, as its public sector contribution to health care funding continues to grow significantly. The point is that the pattern is not clear cut and in other advanced economies such as Canada and Sweden decreases in the share of spending coming from the public purse have been quite significant – and this has been during the good times. The opportunity is now here for more radical change in terms of pushing the agenda for greater private financing of health care. Some governments will be convinced, and make no mistake – if they could dispose of their obligations to health care financing on the basis that it could be more efficiently financed through other means, they would.

More than ever, therefore, it is important to make the case for public financing of our health services. However, we need to make that case on the same grounds as the market reformers – that of efficiency as well as equity. But, there is a quid pro quo. Strictly, in Latin, quid pro quo means ‘something for something’ or some sort of exchange of goods or services. This fits the language of economics nicely, whereby obtaining something that is worthwhile involves some sort of sacrifice, or a price to pay, even if that price is not determined in the marketplace.