Is Contracting Out Tantamount to Privatisation?

“Owen Smith wanted to privatise the NHS”.  Expect to hear a lot more statements like this over the coming months.  The basis for this claim as far as I could tell from the interview on the Today programme was that he had in the past supported the idea that the NHS does not provide some relatively routine surgery itself, but contracts out to private firms for common knee and hip operations.  There was no suggestion, even from Mr. Smith’s detractors that patients would have to pay for these operations, rather the money would come from the NHS.  The implicit definition of privatisation here is truly ludicrous.  The involvement of the private sector in almost anything the NHS does is being defined as privatisation.  What follows is a bit of reductio ad absurdum, but very little reductio is required before absurdum is reached.

If purchasing goods and services from private suppliers is to be thought of as privatisation of the NHS, then the NHS has always been private.  There are some things the NHS has always purchased from the market.  The scalpel used by a surgeon performing an operation was not designed and manufactured by the NHS.  The NHS did not even mine the iron ore or smelt the steel itself.  All stages of production of the scalpel from design to the extraction of the necessary raw materials were performed by the private sector.  The NHS simply purchased the scalpel in the market.

Under the definition of “privatisation” used by Mr. Smith’s detractors a truly public NHS would need to have (among other things):

• Their own iron mines to extract iron ore for which would be turned into steel in NHS steel works for making scalpels and other surgical equipment in NHS factories;
• Their own brick-making facilities to supply the bricks with which hospitals and doctors’ surgeries are built; and
• Their own power plants to produce all the electricity used in NHS hospitals and doctors’ surgeries.

Since the NHS has never had its own steel works or power plants it has always been a private sector entity.  This is clearly ludicrous.

The reason I find these cries of privatisation so disagreeable is that they are obscuring the conversation we need to have about the NHS.  The NHS is a wonderful institution.  For a nation to provide healthcare to all its residents free at the point of delivery so that everyone, rich or poor, receives the same high quality healthcare is little short of a modern day miracle.  But it also becomes exceptionally important that this medical care is provided in the most cost effective way possible.  This is obvious to anyone who understands the nature of opportunity cost.  If more money than is strictly necessary is spent on routine knee and hip operations there is less money to spend on e.g. life-saving cancer treatments.

It might be objected that there is a clear line between the frontline provision of healthcare which should be undertaken by the NHS, and the ancillary support to that frontline for which the NHS should be free to contract out.  However this would be a line that would blur quickly.  In many respects, the surgeon’s scalpel is closer to the frontline of healthcare provision than the surgeon herself.  What about pharmacy services? Must Boots be closed down? Moreover even if such a definite line could be drawn, it is unclear why everything on the frontline side of such a line should be provided by the NHS directly with no contracting out.  To insist on this with no reason would seem quite dogmatic.

The NHS needs to think about what activities it is best placed to perform itself and where it can achieve the same or even better results at a lower cost by contracting out to private providers.  The key issues in making that decision should be:

• Will contracting out actually save money?
• Are there a sufficient number of potential suppliers that there will be:

o   Competition to supply the service in the first place; and

o   Someone we can switch to if we are unhappy with the services provided by the initial contractor.

• Do we have the negotiating strength to ensure we get a good deal (clearly this is related to the point above, but there might be other issues too)?

• Is quality of service easy to measure so as to ensure providers can be held to account?

• Might any quality of service targets be subject of “gaming” by a private provider?

• Can the “soft incentives” provided within the NHS do a better job of ensuring quality than any “hard incentives” that might be offered to private providers (e.g. the NHS esprit de corps).

The list above is by no means an exhaustive list, and there may well be numerous other factors to consider.  These are just the first ones that came to mind.  We also need to bear in mind that for various services as medical technology changes and the NHS’s ability to write complex contracts and negotiating strength change, the answer to whether a service is best provided in house or contracted out may well change too over time.  This has two implications:

• To decide to contract out a service now is not necessarily to say it was wrong to provide it directly in the past.
• If it now makes sense to contract out, we need to consider whether this will remain the case in the future and whether the NHS might lose the capacity to provide these services in the future as a result of contracting out now.

I don’t yet know whether I think it would be a good idea or a bad idea for the NHS to contract out for the provision of some routine operations.  I do know the criteria I would use to judge whether it would be a good idea, I just haven’t had the time to research and judge which side of these criteria routine operations fall on.  My prior is that I would be rather sceptical as to whether sufficiently reliable performance measures could be found which would be difficult to game so that a private provider can be held to account.  But it is something I could be persuaded about.

What I do know is that this is the conversation we should be having.  I also know that this conversation is obscured by one side simply shouting that the other is seeking to privatise the NHS by stealth and the other side shouting back that they are not.  If we want to continue with an NHS that provides high quality healthcare to all British residents free at the point of delivery, then we have to make sensible informed decisions about that Health service, and what it does itself and where it contracts out.  If you want to see what the impact of sloganeering is on our capacity to make those informed decisions, just look at what happened on 23rd June.

Brexiteers and Risk

Here's a quick post about a story that caught my eye.  Apparently Nigel Farage has placed a £1,000 bet on Britain voting to leave the European Union.  Let's assume that Nigel Farage wants the UK to leave the EU, then this tells us something about the man and his attitude to risk.

Suppose I offered you the following two options.  Option 1: I toss a fair coin, if it comes up Heads, you pay me £10,000; but if it comes up Tails, I pay you £11,000.  Option 2, I just give you £450.  Most people, if they are honest, would probably choose option 2.  But on average, Option 1 is worth £500.  If you are honest with yourself and choose option 2, then you are risk averse.

Economists usually assume that individual agents are risk averse.  In other words we don't like risk, and, where possible, we would pay someone else to take on our risks for us.  That's why there are companies that sell insurance.  Insurance policies pay out sums of money in states of the world where certain events have happened, such as our house being robbed, or our car being damaged in an accident.  In that way, betting markets, which bet on events happening or not happening are actually a lot like insurance policies.

So how would a risk averse individual approach betting on the EU referendum given that they have a preference the result should go one way or the other.  If someone really wants to see the UK vote to leave the EU, they should actually bet on the UK voting to stay in.  That way, they narrow the set of possible outcomes in terms of how happy they are at the result.  Their elation at Britain voting to leave would be a little muted by having lost a bit of money, but their disappointment at Britain voting to stay would be compensated by having won some money.

For die hard proponents of either remain or leave, it may well be the case that even bets of £1,000 don't provide stakes high enough to provide full insurance (ensuring they are just as happy in either event), but they must be able to use betting markets to provide some insurance.

So what does it tell us about an individual if they bet £1,000 on their preferred outcome, thus widening the outcomes and exposing themselves to more risk.  It could be that they perceive the odds are very favourable, and so they take on more risk for what they perceive as a much higher expected level of wealth.  However an individual should be aware of and correct for their own optimism bias.

The other possibility, and this seems somewhat more likely, is that they are not risk averse as most people are believed to be, but risk loving.  They enjoy risk and the shot of adrenaline they get as they wait to see if their horse crosses the line first.  The wider the risk, the greater the adrenaline hit and the more fun it all seems to be!

I'll be the first to admit that people like this can be fun to hang around, but I just have one more question for you: How much of your money are you willing to trust them with?  Because a vote for Brexit is a vote to trust some highly risk loving people with all of our money and all of our futures for generations to come.

A Brexit Thought Experiment...

Let me introduce Nigel.  Nigel is a very wealthy family man who lives in a very wealthy region of the country.  He is in fact the 5th wealthiest man in the country.  He's rather proud of this and mentions it quite a lot.

One day, Nigel is looking through his monthly expenditures and wondering where he can make some savings.  Although he is very wealthy, this is a prudent thing to be doing.  After all, as his mother always said: “look after the pennies, and the pounds will look after themselves.”  Looking through his expenses, Nigel spots that family membership of his golf club looks a bit high.  He pauses to consider this fact.  He doesn’t actually much like the officials who run the golf club.  They have a habit of being a bit officious and petty in enforcing the club's rules.  Is this club membership really worth the money?

Nigel broaches the idea of resigning their family membership with his wife and children over dinner that evening.  To his utter amazement, they look at him as though he’s gone mad, even after he mentions the amount of money they’d save.

They point out that the club's facilities are brilliant. They go there and have a great time every week.  Furthermore, Nigel uses it very effectively to network with clients and potential clients.  His family point out that the commission he earns on business won at the club more than covers the cost of membership.

Nigel tries to calmly rebut all their points.

Just because they are resigning their membership of the golf club doesn’t mean they’ll lose access to any of its facilities.  They’ll still be able to use the driving range; the 18 hole course; the restaurant and the bar.  So they’ll still get all the networking advantages too.  The weekly family trips aren’t going to stop.

Nigel’s family seem strangely skeptical about this argument.  How will they get access to the facilities if they are not members.  There is the possibility for non members to use the facilities - for a daily fee.  But the daily fee is large enough that, given the number of times in a year they visit the club, they’d be better off just paying the annual membership fee.  Visitors paying the daily fee still have to abide by all the niggling little club rules when they are at the club.

Nigel is absolutely amazed to hear this rebuttal.  Don’t his family realise how business works.  Once he is no longer a member, he’ll be able to negotiate his own special rate.  After all, he’s the 5th wealthiest man in the country, the golf club will want his business, and will bend rules in order to get it.  So he’ll be able to negotiate terms that wouldn’t necessarily be available to others.

His family are still sceptical.  Will they want our business that much they ask?  They might be a bit hesitant to give us special terms, wouldn’t they think it was dangerous to set that kind of a precedent?

At this point Nigel gets frustrated and and a bit angry: "of course they won’t mind about setting the precedent!" he exclaims.  Afterall, we buy a hell of a lot more from them than they buy from us!

At this point, his family look at each other and just say “yes dear”.  They know from bitter experience that it is better not to argue the point when Nigel has become this animated.  Besides this vocal argument is happening inside the club's restaurant, and people are starting to stare.  It is all a bit embarrassing.

If you are reading and are a British citizen and a member of a golf club or tennis club, or even a tiddlywinks club, then I implore you: before 23rd June, try this:  

• Go to your club, tell them you are resigning your membership, but insist to them that this means you will still have every right to continue using the club’s facilities.   
• If they put up a fight, try to negotiate your own special rate.   
• See how far you get…