The Downing Street Years (105 page)

This buyer/provider distinction was designed to eliminate the worst features of the existing system: the absence of incentives to improve performance and indeed of simple information. The crudity of this system becomes clear when one realizes that there was at that time virtually no information about costs within the NHS. We had already begun to remedy this. But when I asked the DHSS at one review meeting how long it would be before we had a fully working information flow and was told six years, I exploded involuntarily: ‘Good heavens! We won the Second World War in six years!’

Within the NHS money was allocated from regions to districts and then to hospitals by complicated formulas based on theoretical measures of need. A hospital which treated more patients received no extra money for doing so; in fact it would be likely to spend over budget and be forced to cut services. The financial mechanism for reimbursing DHAs when they treated patients from other areas was to adjust their future spending allocations several years after the event — a hopelessly unresponsive system. But with DHAs acting as buyers money could follow the patient and patients from one area treated in another would be paid for straight away. Hospitals treating more patients would generate a higher income and thus improve their services rather than having to cut back. The resulting competition between hospitals — both within the NHS and between the public and private sectors — would increase efficiency and benefit patients.

I held two seminars on the NHS at Chequers — one in March with doctors and the other in April with administrators — to brief myself
more fully. Then in May we began our next round of discussions with papers from John Moore and Nigel Lawson.

Nigel took a critical view of John Moore’s ideas. By now, the Treasury had become thoroughly alarmed that opening up the existing NHS structure might lead to much higher public expenditure. Despite apparent Treasury interest earlier in the idea of an ‘internal market’, at the end of May Nigel sent me a paper questioning the whole direction of our thinking. John Major followed up the attack with a proposal for a system of ‘top-slicing’ by which the existing system of allocating funds to health authorities would continue, but the extra element provided for growth in the health budget each year would be held back (‘top-sliced’) and allocated separately to hospitals which fulfilled performance targets set down from the centre. This was presented as a more practical and immediate way of realizing the objective of ‘money following the patient’. It was, of course, nothing of the sort. Relative to the overall hospital budget the amount of money paid in relation to performance would have been small. Central control of the hospital service would if anything have been increased. And there would have been no attempt to separate buyers from providers — in the short term at any rate — and thus no real provision to make money follow the patient. In short, a characteristic Treasury device to assert its central control of spending and disguise it as extending consumer choice.

In the face of these challenges John Moore did not defend his approach very robustly and I too began to doubt whether it had been properly thought through. We had a particularly difficult meeting on Wednesday 25 May which ended with a decision to commission further work on ‘top-slicing’. Meanwhile, the Treasury did not have it all their own way. I asked them for a paper on possible new tax incentives for the private sector — an idea which Nigel fiercely opposed.

Nigel’s objection to tax relief for private medical insurance was essentially twofold. First, he was — as I have said earlier — a convinced fiscal purist. Tax reliefs in his view distorted the system and should be eroded and if possible removed. Second, he argued that tax relief for private health insurance would in many cases help those who could already afford private cover and so fail to deliver a net increase in private sector provision. In those cases where it did provide an incentive, it would increase the demand for health care, but without corresponding efforts to improve supply the result would just be higher prices. Neither of these objections was trivial — though taken to its logical conclusion the Treasury position implied that we should have been trying to discourage the growth in private sector provision that was already taking place. In any case, both objections missed the point
that unless we achieved a growth in private sector health care, which had been slow over the past few years, all the extra demands would fall to be met by the NHS. In the long term it would be impossible to resist that pressure and public expenditure would have to rise much further than it otherwise would. I was not arguing for across the board tax relief for private health insurance premiums — though in principle that would be justified — but rather for a targetted measure. If we could encourage people over sixty to maintain the health insurance which they had subscribed to before their retirement, that would reduce the demand on the NHS from the limited group which put most pressure on its services.

Nor, of course, were we neglecting the ‘supply side’. The whole approach we were taking in the review was designed to remove obstacles to supply. And in addition the review was considering a significant increase in the number of consultants’ posts, which would have an impact on the private sector as well as the NHS. We had further plans to tackle restrictive practices and other inefficiencies in the medical profession, directing the system of merit awards more to merit and less to retirement bonuses, and we planned the general introduction of ‘medical audit’.
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Nigel fought hard even against these limited tax reliefs but I got it through with John Moore’s help in the first part of July. In other areas I was less happy. The DHSS had been shaken by the Treasury’s criticisms and responded by seeking to obtain Treasury support for their proposals at a formative stage before they presented the review. This gave the Treasury an effective power of veto. Accordingly, the DHSS put forward, with Treasury agreement, a much more evolutionary approach. Though money following the patient and self-governing hospitals remained goals of policy, they were relegated to the indefinite future and ‘top-slicing’ took centre stage in the short term. (Indeed, this idea staggered on, ever more feebly, through almost the entire length of the review. But it failed in its purpose of diverting us from a genuine system of money following the patient, and never made its way into the white paper.)

I had no objection, in principle, to an evolutionary approach to the introduction of self-governing hospitals. We already had a model from our education reforms: hospitals could opt out of DHA control while remaining within the NHS, just as grant-maintained schools opted out of local authority control while remaining in the state sector. But
I was suspicious of the distinction that was emerging between short-and long-term changes, generally worried about the slow pace of the review and thought we were losing our way.

What made me uneasy was that my Policy Unit — which had from the first championed the three reforms of the buyer/provider distinction, money following the patient and independent hospital trusts — presented me with two worrying criticisms. First, we were in danger of letting these ideas be overwhelmed by Treasury considerations of short-term cost control. Second, the reforms under discussion, while vital, extended choice to the doctor and to health service managers but not to the patient who would continue to be the dependant of a locally monopolistic DHA. What was needed to remedy this was some variant of the old idea of the GP as budget holder. In the Policy Unit’s version, the GP would, like the hospital, be able to opt out of DHA control and make his own arrangements with hospitals for the treatment of his patients. The patient would therefore be able to choose between a GP who held his own budget or one who worked under the DHA. At first, this idea struck me as too radical, but it worried me that we seemed, under Treasury pressure, to be moving away from, rather than towards, radical reforms.

At the end of July 1988 I made the difficult decision to replace John Moore on the review. I took this opportunity to split the unwieldy DHSS into separate Health and Social Security departments, leaving John in charge of the latter and bringing in Ken Clarke as Health Secretary. There can no question that John had made a very important contribution to the review. The idea of money following the patient, the distinction between buyers and providers and the concept of self-governing hospitals all emerged in the review during his period as Secretary of State. Also he had pushed hard for tax reliefs, which Ken Clarke would not have done. As he was to demonstrate during the short period in which he was my Secretary of State for Education (when he publicly discounted my advocacy of education vouchers), Ken Clarke was a firm believer in state provision. But whatever the philosophical differences between us, Ken’s appointment was a useful one. His arrival at the Department of Health undoubtedly helped our deliberations. He was an extremely effective Health minister — tough in dealing with vested interests and trade unions, direct and persuasive in his exposition of government policy.

Ken Clarke now revived the idea which the Policy Unit had been urging: that GPs should be given budgets. In Ken’s version GPs would hold budgets to buy from hospitals ‘elective acute services’ — surgery for non-life-threatening conditions such as hip replacements and
cataract operations. These were the services for which the patient had (in theory at least) some choice as to timing, location and consultant and for which GPs could advise between competing providers in the public and private sector. This approach had a number of advantages. It would bring the choice of services nearer to patients and make GPs more responsive to their wishes. It would maintain the traditional freedom of GPs to decide to which hospitals and consultants they wanted to refer their patients. It also improved the prospects for hospitals which had opted to leave DHA control and become self-governing: otherwise it was all too likely that if District Health Authorities were the only buyers they would discriminate against any of their own hospitals which opted out.

Giving GPs budgets of their own also promised to make it possible for the first time to put reasonable limits on their spending — provided we could find ways of having some limit to the number of GPs within the NHS and to how much they spent on drugs, although there was always provision for emergencies. Nevertheless, the Treasury objected to practice budgets, foreseeing the creation of a powerful new lobby for extra health spending, and argued for a more direct way of cash limiting GPs. They also doubted whether all GPs would be able to manage their affairs with sufficient competence and whether many practices would be big enough to cope financially with the unpredictabilities of patient needs. If there were such problems, the patient would suffer.

I myself had initially been cautious and wanted more detail. However, the more closely we examined the concept of having GPs shop around for the best quality and value treatment for their patients, the more fruitful the idea seemed. We decided in the end to proceed again by an ‘opting out’ mechanism, limiting the option to the larger GP practices but extending the services covered by budgets beyond what Ken had originally proposed to include ‘out-patient’ services. We also gave opted-out practices an additional budget to cover the cost of prescriptions.

By the autumn of 1988 it was clear to me that the moves to self-governing hospitals and GPs’ budgets, the buyer/provider distinction with the DHA as buyer, and money following the patient were the pillars on which the NHS could be transformed in the future. They were the means to provide better and more cost-effective treatment.

A good deal of work had by now been done on the self-governing hospitals. As with our education reforms, we wanted all hospitals to have greater responsibility for their affairs but the self-governing hospitals to be virtually independent within the NHS. I wanted to see
the simplest possible procedure for hospitals to change their status and become independent — what I preferred to call ‘trust’ — hospitals. They should also own their assets, though I agreed with the Treasury that there should be some overall limits on borrowing. It was also important that the system should be got under way soon and that we had a significant number of trust hospitals by the time of the next election. By December we were in the position to start commenting on the first draft of the white paper which would set out our proposals. In January 1989 we discussed proposals for giving a proper management structure to the NHS. Then at the end of the month — after the twenty-fourth ministerial meeting I had chaired on the subject — the white paper was finally published.

Henceforth the provision and financing of health care were to be separated, with money following the patient. The old, overelaborate and distorting RAWP (Resource Allocation Working Party) funding system would be ended and replaced by a new system based on population, weighted for age and health, with some special provision for London which had its own problems. Hospitals would be free to opt out of District Health Authority control to become self-governing trusts, funded from general taxation, free to settle the pay and conditions of staff and able to sell their services in the public and private sectors. GPs in large practices would have the opportunity to hold their own NHS budgets. The remit of the independent Audit Commission would now be extended to include the NHS. There would be tax relief for the over-60s on private health insurance premiums. Throughout the system, more powers would be devolved to local hospital management.

The white paper proposals essentially simulated within the NHS as many as possible of the advantages which the private sector and market choice offered but without privatization, without large-scale extra charging and without going against those basic principles which I had set down just before Christmas 1987 as essential to a satisfactory result. But there was an outcry from the British Medical Association, health trade unions and the Opposition, based squarely on a deliberate and self-interested distortion of what we were doing. In the face of this campaign of misinformation Ken Clarke was the best possible advocate we would have. Not being a right-winger himself, he was unlikely to talk the kind of free-market language which might alarm the general public and play into the hands of the trade unions. But he had the energy and enthusiasm to argue, explain and defend what we were doing night after night on television.