Towards a Lehman Health Service?

Original

finance, health, reform

Author(s):  Joe Farrington-Douglas
Published date:  19 Jan 2012
Source:  IPPR

Government and regulators should be looking at how to embed responsibility and ethics in healthcare organisations, rather than importing the institutions and values that were implicated in the greatest market failure for 80 years.

One of the government’s main arguments for its current reforms to the NHS is that they are necessary to meet the economic challenges which stem from the financial crash of 2008. But by directly drawing on the failed models and institutions of pre-2008 economics the reforms fail to learn from recent history. They even bring into NHS regulation the same credit rating agencies that were implicated in the sub-prime bubble, collateralised debt obligations and the collapse of Lehman Brothers, with potentially serious consequences for our health system.

The attention that was focused on NHS reforms last spring – when the Coalition was forced into the unprecedented ‘pause’ mid-legislation – has dissipated since. However, the delay in the legislative process has not fundamentally changed the ideological direction of the reforms.

This is shown in recent policy papers from Monitor – the body that will be overseeing the new NHS market place.  They reveal how deeply the pre-2008 mind-set is likely to permeate the new system. Monitor’s latest proposal draws directly on the institutions of the failed financial markets. Repeating the strategy of US financial regulators, Monitor proposes to outsource the financial oversight of public and private providers of NHS services to the credit rating agencies – Standard & Poor’s, Moody’s and Fitch. In the market mind-set this is a pragmatic approach to preventing Southern Cross style failures of local healthcare services. But by approaching all market failings as technical regulatory issues rather than a more fundamental problem of values and ethics, the reforms entrench the mistakes of past decades rather than learn and renew.

Contestability can have its place in public services, if it is properly regulated and if providers compete on quality rather than on price.  However the reality is that competition in the real, external market – rather than the internal, managed quasi-market developing under PCTs and practice-based commissioning – will be based on a dysfunctional contest for marginal financial advantage, often against consumer interests.

Providers will compete by over-treating and up-coding (shifting patients into higher price categories of treatment) where weakened commissioners are unable to hold them to account. Costs will be shifted up or down the supply chain and under-monitored aspects of care will be skimped in order to increase short term margins – echoing the rail maintenance neglect of the early 2000s or the more recent moral hazard of cosmetic clinics passing repair costs on to the NHS. As in other healthcare markets, providers will compete to cherry pick the profitable service lines and cream-skim the cheapest-to-treat patients. Already NHS hospitals make a loss on emergency care – for which there is no external market - cross subsidising with outpatient or elective services. But these internal Peter-pays-Paul arrangements will be undone by external challenges from the open market, leaving local hospitals with stranded capacity and mounting deficits.

The Bill hands over price setting from the government to the economic regulator. As recent experience in the energy and rail markets suggests, when the government gives up such powers regulators are susceptible to producer capture leading to increasing complexity, less transparency and a lack of accountability. Legal experts also warn that guarantees against price competition will be hard to fulfil, since European procurement law is built around a price-competitive model. Once international competitors have established that competition law applies more widely they will be able to challenge price constraints, and prise open the bundle of services that make a local hospital viable in order to pick the profitable cherries.

These concerns about competition in healthcare are not new, nor are the official denials that they will come true. But the dynamic of the current reforms, in a new departure, removes any control of provision from the government and hands it to the market, regulator and competition courts. The proposal to outsource financial regulation to the credit rating agencies – echoing the move in US financial regulation prior to the sub-prime and credit-default swap crisis –symbolises this fundamental change

Credit rating agencies do not have a health, let alone an NHS, perspective and are by definition interested solely in financial bottom lines. They are not equipped to ask any questions about the ethics or compassion of health care providers or to review whether the central purpose of the health service -  to deliver good quality health care to those in need – is being delivered. Credit rating agencies will boil down these issues into a three letter assessment of how good a prospect they believe a providers is for a profit-seeking private investor. A year ago the US Financial Crisis Inquiry Commission called the three publicly traded multinational agencies, which will be paid to give credit ratings of NHS hospitals and providers, “key enablers of the financial meltdown.” While we await the report of the Public Inquiry into Mid Staffordshire, we can expect it to criticise the perverse focus of managers on the short term balance sheet rather than on quality and compassionate care, an ethic that permeated the organisation from board to ward.

The more hard-headed concern about bringing in credit rating agencies is that they have a poor track record in identifying risk, having rated Lehman Brothers as investment-worthy on the morning of its collapse. The consultation document implies that providers will have to pay one of the agencies in return for a rating. If so there is a conflict of interest with providers having an incentive to select the agency that gives them the lightest touch and best rating, perhaps allowing them to hide the risks of splitting operations from property, as happened in the broken Southern Cross model.

Experience in much more mature markets suggests that irresponsibility, incompetence or sheer over-complexity sometimes prevail over well-intentioned market design. Despite reassurances, the open-ended legislative framework for the NHS reforms means it will be difficult, if not impossible, for politicians, now or in future, to rein in, reverse or control market failure or irresponsible behaviour if it hits the system, with potentially catastrophic results.

Government and regulators should be looking at how to embed responsibility and ethics in healthcare organisations, rather than importing the institutions and values that were implicated in the greatest market failure for 80 years.

 
 

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Joe Farrington-Douglas, Associate Fellow