Norman Fowler was much better at publicly defending the NHS than he would have been at reforming it. But his successor, John Moore, was very keen to have a fundamental review. John and I had our first general discussion on the subject at the end of July 1987. At this stage I still wanted him to concentrate on trying to ensure better value for money from the existing system. But as the year went on it became clear to me also that we needed to have a proper long-term review. During the winter of 1987–8 the press began serving up horror stories about the NHS on a daily basis. I asked for a note from the DHSS on where the extra money the Government had provided was actually going. Instead, I received a report on all of the extra pressures which the NHS was facing — not at all the same thing. I said that the DHSS must make a real effort to respond quickly to the attacks on our record and the performance of the NHS. After all, we had increased real spending on the NHS by 40 per cent in less than a decade.
But the pressure to provide more money for the Health Service was proving all but irresistible. Many of the District Health Authorities (DHAs)[79] which ran the hospitals overspent in the first half of the year and then cut back by closing wards and postponing operations. They promptly blamed us, publicizing the sad cases of patients whose operations had been postponed, or, in the ghoulish phrase used among doctors, ‘shroud waving’. It seemed that the NHS had become a bottomless financial pit. If more money had to be provided, I was determined that there must at least be strings attached — and the best way those strings could be woven together was in the form of a full scale NHS review.
There was another strong reason for favouring a review at this time. There was good evidence that public opinion accepted that the NHS’s problems went far deeper than a need for more cash. Many of our critics in the press admitted as much. If we acted quickly we could take the initiative, put reforms in place and see benefits flowing from them before the next election.
There was a setback, however, before the review had even been decided on. John Moore fell seriously ill with pneumonia in November, almost collapsing during a meeting at No. 10. With characteristic gallantry, John insisted on returning to work as soon as he could — in my view too soon. Not fully recovered, he could never bring enough energy to bear on the complex and arduous process of reform and produced several below par performances in the Commons. The tragedy of this was that his ideas for reform were in general the right ones, and indeed he deserves much more of the credit for the final package than he has ever been given.
I made the final decision to go ahead with a Health review at the end of January 1988: we would set up a ministerial group, which I would chair. I made it clear from the start that medical care should continue to be readily available to all who needed it and free at the point of consumption. The review would seek to reform the administrative structure of the NHS so that the best of intentions could become the best of practice. With this in mind I set out four principles which should inform its work. First, there must be a high standard of medical care available to all, regardless of income. Second, the arrangements agreed must be such as to give the users of health services, whether in the private or the public sectors, the greatest possible choice. Third, any changes must be made in such a way that they led to genuine improvements in health care, not just to higher incomes for those working in the Health Service. Fourth, responsibility, whether for medical decisions or for budgets, should be exercised at the lowest appropriate level closest to the patient.
The ministerial group met first in February. John Moore and Tony Newton represented the DHSS with Nigel Lawson and John Major for the Treasury, working with officials and advisers. Twelve background papers were commissioned covering consultants’ contracts, financial information, efficiency audit, waiting times and the scope for increased charging. The Treasury representatives were especially keen on increasing and extending charges throughout the NHS. This would have discredited any other proposals for reform and ditched the review. I stamped firmly on it. Otherwise, the danger quickly appeared that we had too much information before us on secondary matters and too little about the principles of reform. Accordingly, I asked John Moore for a paper on the long-term options for the NHS for my next meeting. This duly arrived in mid-March and set out the very differing routes along which we might go.
For intellectual completeness all such reviews list virtually every conceivable bright idea for reform. This contained, if I recall aright, about eighteen. But the serious possibilities boiled down to two broad approaches in John Moore’s paper. On the one hand we could attempt to reform the way the NHS was financed, perhaps by wholly replacing the existing tax-based system with insurance or, less radically, by providing tax incentives to individuals who wished to take out cover privately. There were several possible models. On the other hand, we could concentrate on reforming the structure of the NHS, leaving the existing system of finance more or less unchanged. Or we could seek to combine changes of both kinds.
I decided early in the review that the emphasis should be on changing the structure of the NHS rather than its finance. There was, admittedly, some attraction in the idea of funding the NHS by national insurance or an hypothecated tax, which would have brought home to people the true cost of health care and, under some models, allowed them to contract out of certain state services if they chose. In the early stages John Moore and the DHSS strongly favoured such a contracted out, hypothecated tax model for the not very mysterious reason that it would have guaranteed them a large, stable and increasing income for the DHSS. In effect, the DHSS would have contracted out of the annual public spending round. It was a real mystery, however, why the Treasury seemed to smile on such an approach in the early stages. If we rule out genuine disinterested intellectual curiosity, perhaps unfairly, the Treasury’s motive may have been to strike an alliance with the DHSS in order to get control of the review and curb any radicalism of which it disapproved. It could then abandon its apparent support for the hypothecated tax — which indeed is exactly what it did a month or two into the review. We decided during the summer that further work on the finance side should concentrate on the possibility of tax reliefs for private health insurance premiums paid by the elderly and incentives to boost company health insurance schemes.[80]
On the other side of the equation — reforming the structure of the NHS — two possibilities seemed to have most appeal. The first was the possible setting-up of ‘Local Health Funds’ (LHFs). These were essentially a variant on the American idea of Health Maintenance Organizations (HMOs). People would be free to decide to which LHF they subscribed. LHFs would offer comprehensive health care services for their subscribers — whether provided by the LHF itself, purchased from other LHFs, or purchased from independent suppliers. The advantage of this system — which was also claimed for the American HMOs — was that it had built-in incentives for efficiency and so for keeping down the costs which would otherwise escalate as they had in some health insurance systems. What was not so clear was whether if they were public sector bodies there would be any obvious advantage over a reformed structure of the DHAs.
So I was impressed by a suggestion in John’s paper that we should make NHS hospitals self-governing and independent of DHA control. This was a proposal — somewhat more ambitious than that which we finally adopted — by which all hospitals would (perhaps with limited exceptions) be contracted out individually or in groups through charities, privatization or management buy-outs, or perhaps leased to operating companies formed by the staff. This would loosen the excessively rigid control of the hospital service from the centre and introduce greater diversity in the provision of health care. But, most important, it would create a clear distinction between buyers and providers. The DHAs would cease to be involved in the provision of health care and would become buyers, placing contracts with the most efficient hospitals to provide care for their patients.
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’.[81]
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 hosp
itals 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.
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