Health Crisis — numbers in context

The NHS has given its strongest warning yet of an impending crisis.

NHS trust bosses are now ringing that bell — we face a stark choice of investing the resources required to keep up with demand or watching the NHS slowly deteriorate. Trusts will, of course, do all they can to deliver efficiency savings and productivity improvements. But they are now saying it is impossible to provide the right quality of service and meet performance targets on the funding available.

“Efficiency” is one of those words, like “deficit”, which obscures more than it clarifies. Several words have a plain meaning which does not necessarily translate well into the technical meaning used by economists. There are also psychological effects which mask the fact that the sides of the argument are more about trade offs and value judgements than one side being good vs the other being bad.

Efficiency seems good, right? Nobody wants an inefficient health service. But let’s unpack the concept. An efficient service gets more output for its input. This does not necessarily mean that it delivers the best service, however, because of tail-effects — if it takes an input of, say, $90 to get to 90% quality, it does not hold that getting to 95% quality will require only an additional $5 of input. It might take another $90 to get there, and an additional $90 to get to 98% quality. People involved in project management understand that everything is a trade off between budgetary constraints and desired outcomes. If you want to be at the very cutting edge you have to invest significantly over the odds. We make a value judgement as to what is “good enough” for our purposes and whether an increase in investment input will deliver a reasonable return. An investment might make us better, but perhaps not better enough to justify the increase in expenditure.

Another issue with efficiency is that it is a trade off against redundancy. This is a system’s ability to cope with edge-cases, rare events and sudden shocks. Consider the case of computer data backups. The cheapest way to store data — and the way most people do it at home — is to simply store everything on their home hard drive. This is an inherently fragile set up because it introduces a single point of failure. If something happens to your computer, your data is lost. You can introduce redundancy by making backups but, if you keep all your backups in the same physical location as your master data, you still open yourself up to problems if, for example, your house burns down. The belt and braces approach to computer data security involves having multiple rotating backup copies, some stored onsite and some offsite, so that the chances of a single or even multiple failure cascading into an irretrievable data loss situation is minimised. However this comes with unavoidable costs, both financial and in terms of time and hassle.

Consider also the difference between crewing a commercial oil tanker and crewing a battleship. The first kind of ship may have a crew complement of 18–30 people. The second kind will have thousands of crew members on board. This is not because battleships take especially more people to run under ordinary circumstances, but because they are crewed according to the need to operate under bombardment in situations of extreme stress. Even though the phrase “military efficiency” is in common parlance, it does not mean the same thing as when we talk about “NHS efficiency savings.” Military efficiency, generally understood, means that a command is implemented quickly into the desired outcome with a minimum of fuss. This is achieved in most military systems by a strict delineation of authority and responsibility, endless planning at a strategic level, and constant training, testing, maintenance and practice to ensure that all of the human and mechanical parts are well geared up to carry out orders. All of this costs money, which translates into “readiness” rather than necessarily into measurable outcomes every year. Military engineers may well be able to build a bridge across a river in a few hours or less. But this does not necessarily mean that they are more efficient, in all meanings of the word, than a private sector civil engineering project that takes years. Militaries tend to strategise worst-case scenarios and plan for them, which is why they train engineers in constructing temporary bridges quickly even if there is no need for a bridge right now, because they want to be ready for the eventuality that there will be one.

If we were to approach this from a cost-cutting view, looking for “efficiency savings,” we might well come to the conclusion that if the military had spent, say, $1M on training people to build bridges but hadn’t built any in the last 3 years, and that the money was therefore being wasted. This would be an erroneous interpretation because the entire point is to ensure readiness to act quickly. Military structures are designed to be redundant at multiple levels so that they can go from a state of inactivity to frantic activity very quickly.

Now consider the NHS. We approach this problem in the opposite way. We aim for “good enough” outcomes and “most of the time” levels of staffing. But this isn’t necessarily the best approach.

We know, for example, that there are periods of high and slack demand in the NHS. If we were to staff, for example, the dermatology department to cope with winter average capacity, during the summer (as people wear fewer clothes and notice skin issues more often) the NHS will face periods of peak demand that overstretch the available resources, leading to failures in delivery, long wait times, overworked staff etc. If, on the other hand, we were to staff to cope with peak summer demand levels, we would have periods for most of the year when demand was significantly under the available capacity, resulting in “inefficiency” — effectively paying doctors to sit around and do nothing. We can’t warehouse dermatologists, nor can we repurpose them into other specialisms at a whim. The lead times on the “production” of a medical specialist are measured in years not weeks.

“Military” efficiency, the capacity to respond to short periods of peak demand smoothly and quickly, comes at the cost of economic efficiency, getting the highest average output from the lowest average input.

This is not to say any particular trade off is right. But the rightness comes down to value judgements and how we weight particular outcomes. There are no objectively correct answers without filling in the variables upfront as to what we value vs what we can afford to lose. When it comes to human lives my instincts are that we can afford to spend the money to gain the tail-end 95%, 98% increases, but there are arguments to be made here, especially when we get into the nitty gritty of granular analysis.

However, we rarely — indeed I would say never — have discussions about NHS spending in terms of these trade-offs. Rather our discussions take place in a strange world of ideology where everything is possible with the right application of managerial skill. Politicians implement new strategies to support their ideological biases. Managers are caught between a rock and a hard place of eking out “efficiency” while coping with a rise in demand from the demographic shift to an aging population and the increased expectations of healthcare quality. And amongst all this we are subjected to reporting that uses decontextualised Big Numbers to prove that the NHS is some kind of unwieldy bloated mess that sucks money out of our economy.

The NHS budget is around £116Bn. This is a big number. £116,000,000,000. That’s a lot of zeroes. You’d certainly appreciate getting it in your bank account. But big numbers stripped of context aren’t really informative. How big is that really? Is it too big? Is it not big enough? How can we tell?

Let’s look at it another way. How much do we spend per person, per year, and how does that compare to other countries? This seems to me to be a good way to contextualise NHS spending broadly, to give an idea of where we stand. We would expect to spend more in total than, say, Crete, because there are more of us, and less in total than the USA, because there are fewer of us. So a per person spend is a good way of standardising.

This sort of thing is a little tricky to measure because, as with all stats, you need to do various forms of standardisation, and various countries measure things differently. When you look at these figures you’ll see a range of values, however you won’t see the overall trends and positions change much. Whatever you look at, you’ll get a result that looks like this:

There we are, right in the middle of the OECD, with many countries spending plenty more than us.

There is a lot of media coverage at the moment of the amount of “extra” funding the NHS needs to cover its “deficit” — i.e. the amount of money it needs to provide services vs how much the government has budgeted for it. The deficit was £2.4Bn. Jeremy Hunt and Theresa May claimed that they were putting £10Bn extra into it, but that looks to be an, er, “exaggeration” at best, with the real figure looking to be something like £4.5Bn by 2020/21.

But is that a lot? Let’s do some back of the envelope maths and contextualise it again. Let’s say, for example, that instead of talking about big numbers that we were to just say “let’s spend as much as France does, per person.” France is a broadly comparable country, with decent healthcare outcomes. What would that change in the NHS funding?

Going by the OECD figures we can see that France spends about 30% more per person than we do. If we were to match that by putting a 30% increase into the current NHS budget of £116Bn that would equate to a £35.2Bn increase in the total. That’s not to say that such a broad target is feasible or necessary, but it’s a useful contextualisation of the numbers we’re talking about. It gives us a baseline to see whether £10Bn would make the NHS flush with cash or whether £4.5Bn in 5 years is a significant increase — clearly the answer is no. Even if Hunt hadn’t been exaggerating, his figures wouldn’t represent something that would bring NHS spending into line with countries such as Canada, France or Germany, keeping us down in the Italy/New Zealand region. (The USA is, of course, a ridiculous outlier and so it’s not really worth doing the comparison there. Don’t be like the USA, everyone.)

It’s worth also, at this point, addressing a broader economic point. Much discussion of government spending is set within constraints of deficits and debt, and the ideas that the government is both revenue constrained and that it has to shrink in general. That is to say, even if we did decide that the optimum outcome was to be found in matching France and providing a bump in healthcare spending of 30% a year, this may simply be fiscally infeasible. What if, to quote Liam Byrne’s infamous note, “there’s no money left”?

The way we think about government spending in mainstream discussion is significantly at odds with the way it is thought about in economic theory, even bearing in mind the differences in opinion between economists. We tend to think of governments gathering in taxes from the private sector and using that money for public services. This really isn’t the case any more and hasn’t been for decades. As a model of government spending it is simple, intuitive, and wrong.

It’s better to think of government as being the manager of the money supply rather than as an actor which has or does not have money itself. Think of the government like the referee in a football match. The referee does not “have” any goals to give out, nor can the referee “run out” of goals. If the score at the end of the match is 8–10, the referee does not have to borrow goals from future matches, and if the score is 0–0 the referee does not have a surplus of goals remaining. While there will always be disputes about the bentness of a given score based on whether your team won or lost, broadly speaking a well run football match will have a number of goals at the end which coincide with the number of times the ball crossed the goal line. A referee could, in theory, disallow all goals, or arbitrarily award 100 goals to each team, but this would obviously be a bad move. The aim is to match the score to the activity on the pitch.

Similarly we are better off thinking of government not as raising money through taxes and redistributing it through spending, but of using its various policy instruments to manage the money supply so that it broadly matches the available economic activity of the economy. Enough so that there is sufficient money to buy what the productive capacity of the economy can produce, not so much as to increase inflation.

This is not how we are used to thinking about government finance, but it is broadly uncontroversial in economics. No economist will really believe that the government has a store of dollars to give out. They may believe that it is better for the government to behave as if this is the case, for a variety of reasons, but here we get into the areas of disagreement and the ongoing argument of “austerity” spending that has engulfed Europe since the financial crisis.

The big theory underpinning pro-austerity politicians and economists is the idea of “crowding out” and the money multiplier. Rather than being based on a fixed stock of money, this rather focuses on the results of government spending. The theory goes that government will spend a given £1 to worse effect than the private sector will. Government spending of £100 will displace £100 of private spending and the net result will be worse. The concept of the money multiplier is central to this dispute, that is how much economic growth does £1 of government spending produce in the broader economy. If a government spend of £1 only produces 70p of growth that is an argument for crowding out (although not necessarily an argument against that spending if it is something that is not best provided by the private sector, such as the military or the police force.) If £1 of government spending produces £1.50 of growth then that is an argument in favour of it. For crowding out to hold true, the money multiplier needs to be below 1.

There is complexity, often glossed over by those who wish to argue from the ideological position that government is always and by necessity bad, in what government spends money on and when. Arguments have been raging since Keynes as to the precise circumstances in which the money multiplier is above one and therefore when the government should be encouraged to spend and when it is below one and the government should be encouraged to cut back on spending to free up space for private enterprise. The hard core Austrian perspective, adopted by many European finance ministers including our own dear Chancellor George Osborne in the aftermath of the financial crisis, is that the money multiplier is always low, that government will always crowd out private spending and thus it is always necessary to cut, cut, cut. The more moderate Keynesian view is that the multiplier changes depending on the economic weather. If the country is experiencing a recession and slack demand, the multiplier will be higher than if it is chugging along nicely. Such a view sustains the moderate “counter-cyclical” view, broadly understood as meaning that governments should run fiscal deficits in bad times and fiscal surpluses in good times. You may note that this is broadly the same kind of result you would get if the government were revenue constrained and, like Joseph in the Old Testament, needed to build up its grain stores during the seven fat years of plenty in order to see itself through the seven lean years of famine, even though in modern economies government taxation is several steps removed from the process of grain warehousing. This is what I mean when I say some economists think it is better for the government to act as if things which aren’t true are true. If it is easier for politicians to think in terms of “saving up for a rainy day,” it doesn’t matter if they have fully grasped the implications of the real function of money — the outcome is what matters.

Other economists, such as Abba Lerner, were much less proscriptive when it comes to government spending. Lerner’s rules of Functional Finance state that government spending and borrowing should be entirely dictated not by any measure of deficit or surplus, but by the economic activity of the economy. Many modern followers of Lerner, such as Stephanie Kelton, will interpret this to say that governments should normally run deficits, and that insisting on applying the “run a surplus in good times” rule is in fact a destructive mistake.

This is all by way of background, to again try and ground the discussion in the idea that unlike our popular conception that “deficits” = “bad” — a formulation I think is at least partly down to the negative connotations of the word deficit— there is in fact a real area of disagreement here, and that a lot of the ways we talk about government inefficiency come more from the influence of radical economists like Hayek and Mises on the intellectual landscape of government during the Thatcher/Reagan era. We talk about these things as if they are settled, which enables politicians like Osborne to get away with framing the terms of the debate in terms of “belt tightening” to save money during bad times, without contextualising these decisions as assumptions based on a particular economic theory. The influence of the radical right’s simplified narratives are so strong that even though Osborne’s austerity experiment has been proved woefully inadequate, we still find ourselves unable to move beyond the frame of “can we afford it?” when it comes to public spending.

Unlike the value judgements of efficiency vs redundancy, the money multiplier is in some way measurable, although of course there is dispute over the correct way to measure it. A 2013 paper from Globalisation and Health provides some insight by breaking the impacts down into per-sector spending.

This makes intuitive sense. Government spending on rolling out fibre optic infrastructure obviously seems more likely to provide an economic good for the population than government spending on bribing a foreign politician. In between those two extremes there are many disputable shades of grey, so it can only be a good thing if we have the figures to hand so we can make an informed decision.

It’s worth pointing out that knowing the multiplier for various sectors does not, as a single measure, mean that government spending should be cut or increased, as there are other social implications and, indeed, other measures of national wellbeing than GDP. It is fairly uncontroversial to say that even if the multiplier of, for example, the fire service was below one, that is still not an argument for cutting or privatising the fire service. Many of us would far prefer to carry the costs of having a fire service than to do without one.

That said, across Europe health spending appears to be broadly more stimulative than the average in government spending. The paper gives an estimated multiplier of 2.5–6.1, i.e. for every £1 of government spending pm healthcare the economy gains between £2.50 and £6.10. There are areas of uncertainty, but it provides no support for the idea that NHS spending crowds out the private sector and some support to the idea that increasing domestic spending in the health sector will have broader advantages economically.

I make no secret of my own biases towards the NHS, which I consider to be one of the greatest achievements of Britain and an institution worth fighting for. Unfortunately I don’t think this opinion is held by many with their hands on the purse strings.

I do not know to what extent our conversation about NHS spending is decontextualised because of ignorance, and how much of it is a deliberate attempt to frame the institution in such a way as to support the extremist arguments of right wing free marketeers who hate successful public services because their existence puts the lie to their ideological commitment to the primacy of the private sector over the public sector at all times. I do know that we are grossly underserved by a national conversation in the media and political class that accepts extremist arguments and does not provide context for the claims made by politicians about the NHS.

We can have an honest discussion about the way forward for the NHS only if we are well informed about what it is we are discussing. What do we mean by efficiency? What do we mean by affordability? These things should not simply be passed by in the discussion but interrogated and examined so that we have a clear view as to the trade offs our politicians are making on the way to selling clinics to Richard Branson.

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