Higher productivity: public sector or private sector?

I have been blogging on the Conservatives' NHS policies because I agree with David Cameron that the next election will be mostly about the NHS. But that is where our agreement ends. I believe that the result of this election will be a make or break decision for the NHS, it will determine if we have a publicly owned and publicly run service, or a privately owned and privately run business.

Andrew Lansley has recently written about the main Conservative health policies in Policy Review Magazine. In this article he justifies his policy to privatise parts of the NHS using the following statement about productivity:

"we can not go on seeing productivity fall in our public services, just as it rises in the private sector"

Before we examine these claims (that the NHS has falling productivity, and the private sector has increasing productivity) note that Lansley has not given any figures for the respective productivities. This is important because if the private sector is twice as expensive as the NHS, and the private sector price decreases by 1% a year and the NHS increases by 1% a year, it will take decades for the private sector to match the NHS rate. So be careful when comparing rates of productivity.

The problem is defining productivity in a service. Productivity may be defined in manufacturing as the number of items produced per unit cost (volume output / volume input), and a new process that produces items more cheaply will be seen as an improvement in productivity. The problem is that in healthcare all work carried out must be at the highest quality, and a much higher proportion of resources must be invested in quality in healthcare than in manufacturing.

NHS Productivity

When it comes to productivity, public services present a problem because the outputs cannot usually be expressed in monetary terms. This issue is addressed by the ONS who say:

"The general framework for measuring productivity in public services is based on the relationship between inputs, activities, output and outcomes. In health, inputs are the resources used to produce health care activities, for example, medical staff, prescription drugs, and hospitals. Health outcomes are the final events produced by National Health Service (NHS) output, for example, increased life expectancy. However, it is important to recognise that other factors outside the control of the health care system also impact on health outcomes, such as smoking habits, diet and lifestyle.

Accordingly, health care output should be regarded as only the improvement in health outcomes directly attributable to the NHS."

The ONS get around this issue by measuring the change in productivity rather than the the absolute measure of productivity:

"the change in health care productivity is estimated by dividing the index of health care outputs by the index of health care inputs, using volume measures"

That is, the indexed inputs is the change in inputs (labour, goods and services and capital) from one year to the next. If productivity remains the same then the indexed outputs, the change in outputs (for example the number of procedures performed), will be the same as the indexed inputs. If the change in indexed outputs is more than the change of indexed inputs then productivity has raised, if the change in indexed outputs is less than the change of indexed inputs then productivity has fallen.

During the ten year period, 1997 – 2007, the output of the NHS has increased 52.5% (ONS). This is quite an impressive improvement, an annual average growth of 4.3%. The key figure, of course, is by how much the inputs have increased to achieve this figure. Over the period 1997-2007 the inputs increased by 59.3% (an annual average of 4.8%). ONS interpret this as a ten year fall in productivity of 4.3% in total or an annual average fall of 0.4%. This is the figure that Lansley is using when he says that there has been a "productivity fall in our public services".

Analysis of NHS Productivity

However, he is being disingenuous, or worse, he is telling a complete lie.

Firstly, if we take the ONS figures at face value, 0.4% year-on-year fall in productivity is really not much. However, I would dispute that there is a real fall at all. The fact is, in 1997 the NHS was seriously underfunded and undermanned and had had two decades of underfunding. Consequently there was a need for a lot of capital expenditure and an increase in clinical staff. Things had got so bad that increases in capital expenditure and manpower were needed simply to stand still. We have had billions in investment (an estimated £11 billion of PFI) over that period, and I would argue that if proper investment had been made in the two decades before, the level of capital investment in the decade after 1997 would not have been necessary. In short, for the decade after 1997 the country was paying the cost of underfunding and mismanagement of the previous Conservative administrations.

In the period 1998-2008 there was an increase in the numbers of doctors of 37% and a rise in the number of nurses of 21%. When you look at it this way the increase in output (52.5% for 1997-2007) showed that output increased at a higher rate than the manpower input. That means a real increase in productivity. So considering the huge capital investments over the last decade, a productivity fall (using a measure that includes capital investment) of a mere 4.3% is quite remarkable. And if you exclude capital investment the productivity would be a year-on-year increase.

Private Sector Productivity

So what about the private sector, where is Lansley getting the "rises [of productivity] in the private sector"?

The problem is that this appears to be more of an aspiration than anything else. Conservative doctrine is that the private sector is always more efficient than the public sector. It is a deeply held belief but it is rarely supported by facts. There are no published figures for the productivity of private healthcare in the UK since this is clearly considered to be "commercially sensitive". Instead, we have to look at other measures. The Healthcare Commission (now called the Care Quality Commission) said in 2006 that private healthcare did not outperform the NHS in terms of quality.

"Anna Walker, the commission's chief executive, said standards in the independent sector were "pretty much the same" as in the NHS."

So if the private sector are not providing better outcomes, then perhaps they are providing the same care as the NHS, but at a lower cost? It appears not. The British Medical Association (BMA) is spearheading the Look After Our NHS campaign under the stated goal of Publicly funded, Publicly provided. In their campaign literature they say:

• Many private NHS providers have received millions in guaranteed payments for contracts, despite treating fewer patients than planned; on average, the first wave of Independent Sector Treatment Centres delivered just 85% of activity paid for - suggesting a shortfall of £220 million on the £1.47 billion contracts
  
• New 'GP-led health centres' have been costly, enjoying on average three times the funding per patient of regular GP practices, despite in some cases very few patients registering with them
  
• Every eight cases diverted to an Independent Sector treatment centre costs the taxpayer the equivalent of almost ten cases dealt with by the NHS
  

Further, the NHS Confederation notes:

"NHS chief executives' counterparts in the private sector are paid, on average, £424,000 - around three times the average salary within the NHS."

Clearly, on these measures private sector solutions are not as cost effective as public sector solutions. To investigate whether the private sector can cut costs in treatment let's have a look at a case study.

A case study: Cataracts

Cataracts are when the lens within the eye goes opaque. The treatment for this condition is to remove the lens and replace it with an artificial lens. The operation is usually carried out one eye at a time in a day surgery and the procedure takes about 20 minutes. This is very much production line surgery, the eye surgeon can perform one operation after another. Cataract surgery is straightforward and hence it is a good candidate for the private sector to bring in innovative, cost effective solutions.

NHS hospitals are paid according to the Payment by Results
national tariff. In effect this is the average cost of each procedure averaged for NHS hospitals in England. When a patient has a cataract operation the hospital will be paid the national tariff for the procedure. (The payment may be slightly more since the Department of Health applies what is known as the Market Forces Factor to the payment. This factor varies between 1 and 1.35 and is used to adjust the payment to reflect the difference in the costs across the country.) The current national tariff for "phacoemulsification cataract extraction and lens implant", replacing a cataract, is £741 per eye.

So what about the private sector? Well, the first point to be made is that the NHS will implant a basic lens. If you choose to use private healthcare then you will be given the option of different lenses (for example to reduce UV, and even varifocal lenses) and some of these specialist lenses can significantly increase the costs of the procedure. Therefore, when comparing costs with the NHS you should only look at the lower end of the range because this will be more equivalent to the NHS treatment.

The following is not a scientific analysis, but it should be representative. I performed a Google search for "cataract + cost" and came up with the following:

Provider	Cost per eye
Advance Vision Care	£2190
Ashtead Hospital	£1550
BUPA	£1800 - £2900
Capio	£1650 - £2604
Cataract Care	£1945
Cataractsurgery.co.uk	£1300 - £1600
Consultants Eye Surgeons Partnership	£1950 - £ 2500
harleystreetdirectory.com	£1550 - £2950
Nuffield	£1950 - £2600
Spire Healthcare Hospitals	£1800 - £2900

 
This table is a mixture of actual quotes from surgeons, quotes from hospitals and clinics and general quotes from the large healthcare insurance companies. As you can see, the lowest quote is £1300, but the average cost is closer to £1800 or about 2 and a half times the NHS national tariff. Clearly the private sector has a lot of catching up to do to get to the productivity of the NHS!

It has to be said that Andrew Lansley's plan to involve the private sector more in providing NHS care comes with the proviso that the private suppliers must perform the work to the same standard and at the same cost as the NHS. The Conservative "draft manifesto" says:

"To give patients even more choice, we will open up the NHS to include new independent and voluntary sector providers – if they can deliver a service that patients want, to a high standard and within the NHS tariff, then they should be allowed to do so."

Note the use of the term independent provider rather than private provider. The results above show that the private sector will have to achieve some serious cost cutting to get their costs down to the national tariff. Or maybe the Conservatives are thinking about a different type of private provider?

Independent Sector Treatment Centres

In 2003 the New Labour government awarded contracts for 23 ISTCs in England (and one in Scotland). These facilities were run by the private sector on contracts to treat NHS patients. Initially the agreement was that the centres would not use NHS staff, but more recently the rules have been relaxed to allow NHS consultants to do some work in ISTCs.

Again, it is difficult to find published information about the productivity of ISTCs, so we have to do a bit of work ourselves. Hansard lists the statistics for the Ophthalmic Chain Cataract Initiative provided by Netcare Healthcare. This contract is worth £42 million and for this money the clinic performed 44735 operations or £939 per procedure. This is clearly more (by one quarter) than the NHS national tariff.

Another example is the Mercury Healthcare ISTC. In a paper for the Public Services International Research Unit, Jane Lethbridge says:

"In 2006, every cataract operation at the Mercury Healthcare ISTC at St Mary's Hospital, Portsmouth, cost £5,590 compared to the standard NHS price of £847. The public has so far paid £335,412 for 60 cataract operations at the private-sector centre, since it opened on December 19 2005. The same number would cost £50,820 at an NHS hospital. Mercury Healthcare has an £84m, five-year contract, with local NHS commissioners. The contract states that Mercury should carry out 1,650 cataract operations a year, but the company gets paid whether patients are referred or not. The government also pays out an extra 20% to compensate Mercury for setting up the £10m centre."

Furthermore, as mentioned above, the BMA say about ISTCs: "the first wave of Independent Sector Treatment Centres delivered just 85%" and "Every eight cases diverted to an Independent Sector treatment centre costs the taxpayer the equivalent of almost ten cases dealt with by the NHS".

Quite clearly ISTCs are not value for money, and this model the private sector is not more efficient than the public sector.

Higher Productivity: Public or Private Sector?

It is quite clear from the figures given above 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 administrations, 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. So as usual, the Conservative rhetoric that the private sector is better than the public sector is clearly wrong. Furthermore, Lansley is deliberately trying to mislead the public by claiming that productivity is better in the private sector than in the public sector.

Update (16 March 2010): The Guardian supports the assertion that the private sector is not as efficient as the NHS, specifically private sector involvement in the NHS.


"According to the health select committee, the work carried out by the first wave of independent sector treatment centres (ISTCs) was 12% more expensive than it would have been had it been undertaken by the NHS. After its first three years of operation, the Manchester ISTC was delivering just 63% of the contracted work it had been paid for."


Day after day, Lansley's pathetic anti-NHS lies are discounted.

Protect our public services from creeping privatisation. Public services unions and professional associations are organising a march and rally on the 10 April in London. For more details see www.10410demo.co.uk. In addition the British Medical Association is campaigning to keep the NHS a public service, visit their site at www.lookafterournhs.org.uk.