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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