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By Root 2984 0

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.*

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