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Martin McKee: Make or buy? – when should the NHS buy from the private sector?

The NHS is facing an existential crisis. Years of underinvestment left it unprepared for the pandemic. The UK had failed to train enough health professionals or to build modern, well-equipped facilities for them to work in. It was picking up the pieces of widespread failures in other sectors. Millions of people were living extremely precarious lives and a decade of austerity had left social security safety nets in tatters. As a recent Financial Times analysis noted, Britain is a “poor country with some very rich people”. Now, a demoralised workforce, diminished by high levels of burnout and illness, and especially Long COVID, are giving up. This winter could be brutal.  

Something must be done. We need more capacity. But where will it come from? Inevitably, some are arguing that we must look to the private sector to make up the shortfall. There are some obvious problems with this idea. First, the NHS and private providers are fishing in the same pool of health professionals. Second, many of the things the NHS needs, such as sorting out the problems in emergency departments, are not being offered by the private sector. And critics will inevitably point to the negligible impact (and undisclosed cost) of the deal to cover the costs of private hospitals during the pandemic or a number of earlier high-profile failures of private contracts, such as that to operate Hinchingbrooke hospital. On the other hand, as the advocates of greater private provision have argued, much NHS care has long been in the private sector. General practitioners are, in effect, small businesses, as are many community pharmacies. And many of the things that the NHS needs must be bought from the private sector. These range from furniture and stationery to medicines and technology. These considerations take us to a longstanding question in public administration. When a public body needs something, should it buy it (from private providers) or should it make it (keeping it in-house)? 

Much of this debate has taken place in sectors other than health. Throughout most of the 20th century governments across the world expanded their activities into areas such as the provision of basic utilities, such as water or power, housing, and services such as health or education. This was either because those sectors did not exist at scale, as in many low-income counties, or because of failures in what was often a poorly organised patchwork of provision. Starting in the 1980s, this process reversed and, in some countries, many of these sectors were privatised, either by the sale of shares to the public or transfer to existing commercial entities. Although there is an extensive body of theory, especially associated with work on transaction costs by Nobel laureate Oliver Williamson, as well as a growing body of empirical research based on the evaluation of privatisations, this evidence has often been ignored as policies have been pursued based primarily on an ideology that favours the private over the public sector.  

In brief, this literature suggests that the state can safely contract for goods and services where the products are clearly definable and there is minimal scope for gaming but would be advised to retain control where these conditions do not apply.  

The concern about gaming in health care is long-established. The classic work is by another Nobel laureate, Kenneth Arrow. He argued that physicians (and by extension all providers of health care) are exposed to moral hazard because they are engaging in transactions where one party always has information that is not available to the other. In practice this means that they can engage in, for example, cherry picking, where they only select patients that are not old, have no co-existing disease, and are unlikely to experience complications. This will leave the NHS to look after everyone else, at much higher cost per patient, potentially adding to a long term issue in the NHS: the inverse care law; those who needing timely care most, not getting it. 

We also have some recent examples in the NHS. We have seen not only how hospitals that outsource their cleaning services have fewer cleaning staff, lower standards of cleaning, and higher rates of hospital-acquired infection but also that measures of cleanliness increased briefly at the time of inspections but fell afterwards, something not seen when cleaning was in-house.  

In practice, this means that it would make little sense for a government to produce its own medicines or technology, although this assumes that there is a robust regulatory system. Here the challenges should not be underestimated as, post-Brexit, the Medicines and Healthcare products Regulatory Agency is facing severe budget cuts and advances in areas such as artificial intelligence pose new difficulties. However, it should be cautious in privatising the care of people with complex disorders.  

But there is another issue. This is the relative power of the two parties to the transaction. Public authorities in many other European countries have designed procurement exercises in ways that encourage local small and medium enterprises (SMEs) to submit tenders. This is entirely possible under inherited EU procurement legislation and can be used positively. For example, procuring locally can help the local economy, employing local people and paying taxes. Second, it can help prioritise and consolidate long-term relationships based on trust. Third, in some places, for example, Italian regions, local authorities have been able to build effective innovation systems linking SMEs, universities, and health providers. Conversely, procuring with large corporations do neither. But the most important reason is that these corporations can exert enormous power, capturing regulators and lobbying to get legislation that favours them rather than the public good. As the sociologist Steven Lukes, perhaps the leading theorist in this field, has noted, this power is often hidden but can shape the agenda and even how people think about things. There is no comparison between contracting with a family-run care home and a multinational corporation. 

So much for the theory. What happens in the real world? There is now a large amount of evidence consistent with the theory and shows that where private health services care for people with complex problems it often leads to poorer but more expensive services. Thus, after controlling for country income and other covariates, countries with greater private health expenditure had more COVID-19 cases and deaths while a recent UK study found that private sector outsourcing to for-profit companies, which increased consistently from 2012-20, corresponded with significantly increased rates of treatable mortality, potentially as a result of a decline in service quality. There is also strong evidence that privatised or marketized health systems increase inequalities in healthcare access and outcomes.   

There is one final consideration. There will sometimes be activities that are straightforward and there is no risk of gaming but those undertaking them do other things. We can illustrate this with the situation in which a family is taken to hospital after a car crash. Those with broken limbs will need orthopaedic surgery but the surgeons may have been redeployed to a separate centre for elective procedures, as may the ophthalmic surgeon needed to remove glass from eyes but is elsewhere clearing a cataract backlog. Hospitals are complex systems and destabilising one part can easily have unforeseen consequences that only become apparent when it is too late.  

Deng Xiaoping famously said, referring to the choice of a market or a planned economy, that it does not matter whether a cat is black or white as long as it catches mice. As both the theory and evidence show, in health care it does matter. If a proposal seems simple, it is probably wrong.  

Note: Although Martin McKee is President of the BMA, this should not be seen as reflecting the views of the Association as he writes in a personal capacity. Also, it should not be interpreted as offering support for any political party 

Martin McKee

Martin McKee CBE is Professor of European Public Health at the London School of Hygiene and Tropical Medicine.

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