Is the private sector really more productive than the NHS?

Is Andrew Lansley right in saying private healthcare providers are more productive than the NHS? And will increases in productivity save all that much money?

In a recent article for Policy Review magazine Andrew Lansley set out his plans to privatise parts of the NHS, as a means to deliver “equity, efficiency and excellence” at a time of “crisis in our public finances”. While writing “healthcare in time of need should be a right for all, rather than a privilege for the few”, the shadow health secretary looks beyond the State for a lead, adding “we can not go on seeing productivity fall in our public services, just as it rises in the private sector”.

Lansley’s comments come at the same time as his renewed emphasis on pushing for a “free market” in NHS provision, which Left Foot Forward reported on Monday. He had called for the Office of Fair Trading to investigate the government’s policy that NHS organisations should be the “preferred provider” of NHS care, accusing health secretary Andy Burnham of being “a puppet of the [health] trade unioins”.

On his remarks about private productivity compared to public, it is worth asking if Lansley making a fair comparison; is he right in saying private healthcare providers are more productive than the NHS? And will increases in productivity save all that much money? The ippr report into “Private Spending on Healthcare” looked at the question of productivity, finding:

• Improvements in productivity are necessary, but will not prevent the need for increased spending.

Healthcare is a highly labour intensive service. Thus the scope for steady productivity gains is probably limited when compared with the average for other sectors of the economy. Healthcare could be exposed to a ‘cost disease‘ or Baumol’s effect (Baumol 1967, 1993) – in other words the prices of medical care services compared with other goods and services in the economy (where mechanisation has reduced production costs) rise.

• Productivity improvements will reduce the rate of increase in healthcare spending, yet the ‘fully engaged scenario’ (incorporating optimistic productivity and public health improvements) still projects an average annual increase in healthcare spending of 4.7 per cent, in real terms, from 1999/00 to 2022/23.

• There have recently been sharp increases in prices: between 2000 and 2005, average increases in real remiums were three per cent in the corporate market and six per cent in the individual market. This has been accompanied by ‘downgrading’, either by restricting cover or increasing excesses, and movement towards lower cost plans in the individual market. Gross margins (administrative costs plus profits) have recently reached higher levels: 23.5 per cent in 2003, their highest level since the late 1970s.

The report concluded that:

“There is still a need for better monitoring of the impact of privately-funded treatment on NHS practice and for continuing to tackle the potential perverse incentives and negative impacts of private practice on NHS work.”

The “Conservative Policies Dissected” blog has also taken a detailed looked at the question of NHS productivity vis-à-vis the private healthcare sector, concluding:

“It is quite clear from the figures given above [see post for full details] that the private sector is considerably more expensive than the NHS. Andrew Lansley may be right that productivity is increasing in the private sector, but it will need to have some very impressive improvements for it to reach the productivity of the NHS.

“When you analyse the NHS you can see that it has achieved remarkable increases in productivity since 1997, but it is the large costs of capital investment, making up for the underinvestment of the previous Conservative admini9strations [sic], that has produced a very small year-on-year drop in productivity. The private sector is a very expensive option for no apparent gain in quality…

“Lansley is deliberately trying to mislead the public by claiming that productivity is better in the private sector than in the public sector.”

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7 Responses to “Is the private sector really more productive than the NHS?”

  1. Clifford Singer

    RT @leftfootfwd Is the private sector really more productive than the NHS?: http://cli.gs/D4tJr

  2. MusicMP

    RT @OtherTPA: RT @leftfootfwd Is the private sector really more productive than the NHS?: http://cli.gs/D4tJr

  3. Meandering Mammal

    I think that this conflates a number of issues, the place of competition in healthcare, the delivery of healthcare by private sector entities on behalf of the public sector, and the mix of private and public work undertaken by individuals in the sector.

    In some parts of the sector there is a very clear argument for competition, particularly in the logistics and supply area, facilities management and hotel services. Reducing expenditure in these areas releases funds for the delivery of direct care service.

    I’d also break down the rang eof services talked about, not all forms of medical and surgical care are suitable for competition, many are. There are some forms of treatment that probably don’t generate the demand for a competitive environment, but for some treatments it would be naive not to consider the potential.

    Essentially in a fair competition a public sector comparator would have as good a chance of winning the competition as any other. Of course that assumes that the public sector comparator bid is realistic and comprehensive. On the other hand the senior stakeholders need to be willing to allow the comparator into the competition, I’ve seen competitions where a comparator was run but only as a baseline.

    We can’t dismiss the public sector retaining some capabilities, but equally we shouldn’t dismiss private sector contributions for idealogical reasons.

  4. Steve Rooney

    RT @OtherTPA: RT @leftfootfwd Is the private sector really more productive than the NHS?: http://cli.gs/D4tJr

  5. John77

    The increase in longevity is interpreted as productivity improvement in the NHS when it is overwhelmingly down to three factors – reduction in smoking compared to previous generations; the closure of the coal mines and a consequent reduction in deaths, industrial injuries and especially pneumoconiosis; better nutrition and less alcohol for those born in the post-war baby boom (reversed for current teenagers) – don’t make me laugh!
    Secondly the NHS did not increase investment after 1997 – Brown adopted the Conservative spending plans and then CREATED a period of underinvestment by giving nurses a headline-winning pay rise but not giving the NHS any extra money to pay for it.
    Comparing the cost of a tailor-made cataract operation at the patients convenience with your choice of lens to suit your needs and after-care with a production-line operation taking twenty minutes on the NHS and a basic lens that ignores your specific needs is like comparing a Rolls-Royce or Mercedes with a VW Beetle. Private patients are those who choose to pay for a Mercedes rather than get a free Beetle and it says nothing about productivity if the Mercedes sells at a price above the direct manufacturing cost (excluding that of premises, staff training and capital equipment which don’t yet appear in NHS costings) of the Beetle

  6. Mr. Sensible

    The Tories are oficially the party of the NHS.

    Not!

  7. Richard Blogger

    @John77 In my blog I made the point that the private sector offers more options about specialist lenses which is why I cautioned readers not to look at the upper figures in the price ranges I quoted. However, the lower figures were all for basic inter-occular lenses. So I took the lower figures as an indication of why the private sector is more expenses.

    However, as I explained in my original article, you could still argue that the private sector treatment was not tailored to the sort of throughput that NHS cataract clinics were designed to be (I said that perhaps the private sector gave a more “gilt edged” service), and so this is why I also looked at ISTCs (which I admit are a New Labour idea, IMO a bad idea). In the example I gave (cataracts), ISTCs still cannot deliver NHS level of treatment at an NHS price.

    @ Meandering Mammal.
    You are right, NHS providers are a mixed market and there are areas where private providers are used, and in some cases used effectively. My point, however, was that it is rather lazy of Lansley to say that the public sector always has lower productivity than the private sector and to use this as his justification for a policy that will ultimately cut the income of NHS hospitals.

    For what its worth, in my local area at a recent planning application meeting for a new private hospital most of the letters in support cited the fact that there were so few private hospitals in the area that it meant there was no competition for private care and this had a detrimental effect, raising prices and lowering choice.

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