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Pricing, Insurance and the National Health Service*

Published online by Cambridge University Press:  20 January 2009

Alan Maynard
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Abstract

Since the birth of the National Health Service in 1948 there have been periodic discussions of the potential role of pricing and insurance in the United Kingdom health care system. This article is concerned with discussing the problems inherent in these mechanisms and it advocates more careful articulation of the cost and benefits of such policies. The first section gives a description of some quite recent proposals to extend the role of the pricing and insurance mechanisms which have been made by the British Medical Association and the McKinsey consultancy company. The second section uses economic analysis to show that both the pricing and the insurance mechanisms have inherent problems which may vitiate their efficiency in many western health care markets. The third section is concerned with the mechanisms by which the efficiency of the health care system can be improved, and radical experimentation is advocated. Without radical experimentation and the implementation of suitable incentive systems, inefficiency and inequality will continue in the National Health Service.

Type
Articles
Information
Journal of Social Policy , Volume 8 , Issue 2 , April 1979 , pp. 157 - 176
Copyright
Copyright © Cambridge University Press 1979

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References

1 McKinsey and Company, Realising the Promise of the Notional Health Service, London, 1977.Google Scholar

2 See BMA, ‘Royal Commission on the National Health Service: Report of the Council to the Special Representative Meeting’, British Medical Journal, 29 01 1977.Google Scholar

3 See Conservative Medical Society, Evidence to the Royal Commission on the National Health Service, London, 1976.Google Scholar

4 see Harris, R. and Seldon, A., ‘Evidence to the Royal Commission on the National Health Service’, unpublished mimeograph, 1977.Google Scholar

5 See ‘Paying for the Health Service’, leading article in The Times, 31 October 1977.Google Scholar

6 BMA, ‘Royal Commission on the National Health Service’. The evidence presented by the BMA to substantiate this underspending hypothesis was thin and spurious. Reference was made to the relatively low percentage of expenditure on health care in the United Kingdom as a percentage of gross national product. Such casual arguments ignore arguments about income effects – see Kleiman, E., ‘The Determinants of National Outlay on Health’, in Perlman, M. (ed.), The Economics of Health and Medical Care, Macmillan, London, 1974Google Scholar; and Newhouse, J. P., Development and Allocation of Medical Care Resources, XXIXth World Medical Assembly, Japan Medical Association, Tokyo, 1975Google Scholar, reprinted in the Journal of Human Resources, 1976 – about price effects and about the possibility that the provision of health care services and the production of improved health status may not be correlated.

7 BMA, Health Services Financing, report of a committee under the chairmanship of I. Jones, London, 1970.Google Scholar

8 Hansard, 31 January 1977.Google Scholar

9 For summaries, see Cairns, J. and Snell, M., ‘Prices and the Demand for Health Care’, in Culyer, A. J. and Wright, K. G. (eds), Economic Aspects of Health Services, Martin RobertSon, London, 1978Google Scholar; and Maynard, A., ‘Pricing and Health Care’, in Judge, K. (ed.), Pricing and the Social Services, Macmillan, London, 1979.Google Scholar

10 For some of the North American evidence of the cross-elasticity demand effects of pricing, see Joseph, H., ‘Hospital Insurance and Moral Hazard’, Journal of Human Resources, 7:2 (1972)Google Scholar; Davis, K. and Russell, L. B., ‘The Substitution of Hospital Outpatient Care for Inpatient Care’, Review of Economics and Statistics, 54:2 (1974)Google Scholar; and Chiswick, B., ‘The Demand for Nursing Home Care: An Analysis of the Substitution between Institutional and Non-Institutional Care’, Journal of Human Resources, 11:3 (1976).Google Scholar

11 For some of the North American evidence of the effects of pricing on the demand of different socio-economic groups, see Bice, T. W., Rabin, D. L., Starfield, B. and White, K. L., ‘Economic Class and the Use of Physician Services’, Medical Care, 11:4 (1973)CrossRefGoogle ScholarPubMed; Enterline, P. E., Salter, V., MacDonald, A. D. and MacDonald, J. C., ‘The Distribution of Medical Services before and after “Free” Medical Care: The Quebec Experience’, New England Journal of Medicine, 289:22 (1973)CrossRefGoogle ScholarPubMed; Townsend, P., ‘Inequality and the Health Services’, The Lancet, 1:179 (1974)Google Scholar; Le Grand, J., ‘The Distribution of Public Expenditure: The Case of Health Care’, Economica, 05 1978CrossRefGoogle Scholar; Beck, R. G., ‘Economic Class and Access to Physician Services under Public Medical Care Insurance’, International Journal of Health Services, 3:3 (1973)CrossRefGoogle ScholarPubMed; Salkever, D. S., ‘Economic Class and Differential Access to Care’, International Journal of Health Services, 5:3 (1975)CrossRefGoogle ScholarPubMed; and Beck, R. G. and Horne, J. M., ‘Economic Class and Risk Avoidance: Experience under Public Medical Care Insurance’, Journal of Risk and Insurance, 43:1 (1976).CrossRefGoogle Scholar

12 The relevant North American evidence is in Brian, E. W. and Gibbens, S. T., ‘California's Medi-Cal Copayment Experiment’, Medical Care, 12:12 (1974)Google ScholarPubMed, Supplement, which is summarized in Cairns and Snell, op. cit.; and in Maynard, A., ‘Pricing and Health Care’.Google Scholar

13 see Lavers, R., ‘The Price Elasticity of Demand for Dental Care and Spectacles’, unpublished mimeograph, University of York, 1977.Google Scholar

14 Evans, R., book review of Perlman, M. (ed.), The Economics of Health and Medical Care, Canadian Journal of Economics, 9 (1974).Google Scholar

15 The Bernouilli theorem states that an individual will prefer insurance with some premium, £x, which covers him against all losses, to facing without insurance a probability distribution of such losses whose arithmetical mean is £x.

16 Without competition to keep them efficient, managers may not allocate resources efficiently. As a result costs (both marginal and average) may be greater than they might otherwise be. see Liebenstein, H., ‘Allocative Efficiency versus X-Efficiency’, American Economic Review, 56 (1966)Google Scholar; and Crew, M., Jones-Lee, M. and Rowley, C. K., ‘X-Theory versus Behavioural Theory’, Southern Economic Journal, 38 (1971).CrossRefGoogle Scholar

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21 Eventually, increased consumption of health care will inflate premiums, as insurers adjust their behaviour to remain solvent.

22 This results from the price reduction consumption increases from QM to QI. The total resource consequence of this is equal to QM XYQI. Of this rectangle QM XQI is a measure of the benefit of additional consumption to patients. The rest, XYQI, is a welfare loss: no benefit is generated, and alternative consumption opportunities are forgone.

23 Pauly, M. V., ‘A Measure of the Welfare Cost of Health Insurance’, Health Services Review, 4:4 (1969).Google ScholarPubMed

24 Feldstein, M. S., ‘The Welfare Loss of Excess Health Insurance’, journal of Political Economy, 81:2 (1973).CrossRefGoogle Scholar

25 see Rowley, C. K. and Peacock, A. T., Welfare Economics: A liberal Restatement, Martin Robertson, London, 1975.Google Scholar

26 Stigler, G. J., ‘The Theory of Regulation’, Bell Journal of Economics and Management Science, 2:1 (1971).CrossRefGoogle Scholar

27 Feldstein, M. S., ‘Quality Change and the Demand for Hospital Care’, Econometrica, 45:7 (1977).CrossRefGoogle Scholar

28 See, for example, Pauly, , Medical Care at Public Expense.Google Scholar

29 see Grossman, M., The Demand for Health: A Theoretical and Empirical Investigation, National Bureau of Economic Research, Occasional Paper 119, New York and London, 1972.Google Scholar

30 see Cochrane, A. L., Effectiveness and Efficiency: Random Reflections on Health Services, Nuffield Provincial Hospitals Trust, London, 1972Google Scholar; McKeown, T., The Modern Rise of Population, Edward Arnold, London, 1976Google Scholar; and Bunker, J. P., Barnes, B. A. and Mosteller, F., Costs, Risks and the Benefits of Surgery, Oxford University Press, New York, 1977.Google Scholar

31 Pauly, , Medical Care at Public Expense.Google Scholar

32 see Coles, J., Davison, A. and Wickings, I., ‘Control of Resources’, Health and Social Services Journal, 18 11 1974Google Scholar; and Brent Health District, Evaluating Management Information Presented to Clinically Accountable Teams, Westminster Hospital Management Research Project 1973–4, London, 1975.Google Scholar

33 The costs and benefits of the alternative payment mechanisms are summarized in Maynard, A., ‘The Medical Profession and the Efficiency and Equity of Health Services’, Social and Economic Administration, 12:1 (1978)Google ScholarPubMed; and in Maynard, A., ‘The Containment of Health Care Costs in the United Kingdom’, in Schweitzer, S. (ed.), Cost Containment in Health Care Systems, papers presented at the Fogarty International Conference, Department of Health, Education, and Welfare, US Government Printing Office, Washington, 1978.Google Scholar

34 Maynard, , ‘The Medical Profession and the Efficiency and Equity of Health Services’.Google Scholar