Friday, 10 June 2011

Public Versus Private Ownership

By Michael Burke

Recent political and corporate events have thrown the relative merits of the public and private sectors into sharp relief.

The NHS is the most popular institution in Britain. According to recent research (p.386) by Lord Ashcroft for the Tories the NHS has a 79.8% approval rating - ahead of the BBC’s 66% and 61.8% for the Royal Family (and 43.1% for the Daily Mail, the lowest rating of all). Full details of the poll and voluminous and valuable additional information can be found here

This fact, and the recent mobilisations by the TUC, provides a difficult environment for the Tory-led government’s attempts to significantly reduce real health spending while qualitatively increasing the role of the private sector.

It is further complicated by the financial distress and possible collapse of Southern Cross Britain’s biggest care home provider. Southern Cross has nearly 31,000 residents in its care homes, mostly elderly patients. It is widely described as having reached a financial crisis because it sold its care home properties and leased them back prior to its flotation on the stock market.

However, this misses an essential point. Blackstone, the private equity group, owned both Southern Cross and the vehicle which became its landlord, NHL. Both were loaded with debt by Blackstone the proceeds of which it took for itself. The debt was created in order to strip the assets. Blackstone’s initial investment of $500mn became a payout of $1.5bn.

At risk now are all 31,000 vulnerable residents in the care homes. Many have already been living in atrocious conditions for some time as lack of capital and high debts precluded investment. In 2010 Southern Cross reported it had already 19 homes rated “zero stars”. It has been announced that 3,000 jobs will be cut in an effort to return to profitability- and with it a reduction in the level of care offered to residents.

Efficiency

The private firms that the government wants to run most of the NHS functions under its ‘any willing provider’ rule are not small enterprises, but major corporations such as Blackstone. Their purpose is not the provision of healthcare but the maximisation of profit – and they will reduce jobs and services or even declare bankruptcy when profits fall.

But the argument in favour of the public sector is not confined to these extreme cases of asset-stripping induced crisis. In all the ideological campaign against the NHS a central truth is obscured- the NHS is more efficient than private sector healthcare. This is illustrated in the chart below reproduced from the OECD’s European Health At a Glance 2010.

The chart shows the correlation between spending on health in a number of European countries versus healthy life expectancy at birth. As would be expected, the general rule is that the greater the spending on health the longer the healthy life expectancy in each country. (The R2 corrrelation of 0.33 in the top left hand corner means that higher spending accounts for two-thirds of the difference in life expectancy, as a perfect correlation would be 0.50).

Figure 1


11 06 10 Health


Inevitability there is some variability around the central trend. Some of this will be to do with the stage of economic development and location, such as the Mediterranean countries’ better health outcomes.

But if we examine the Northern European developed economies there are three which are significantly above the correlation line, which means that they have an above-average life expectancy relative to the amount of health spending, and there are three significantly below. The three above the line are Britain, Sweden and Denmark. The three countries below the line are Austria, Germany and Finland.

Therefore, strictly speaking the first group of three countries is much more efficient in its health spending- they achieve above-average outcomes relative to expenditure. This includes the NHS. The second group of three countries is relatively inefficient, achieving worse health outcomes relative to health expenditure.

This is explained by who is spending the money, and what it is being spent on. In Britain, Sweden and Denmark the public sector accounts for an average of 81.6% of all spending on health. In Austria, Germany and Finland the public spending sector funds an average of 75.9% of all healthcare provision.

These are significant sums - with annual public spending in the first group amounting to €2,819 per person, while in the second group it amounts to €2,331 per person (adjusted according to OECD Purchasing Power Parities , Tables 4.1.1 and 4.5.1).

It should be stressed that this is not a function of the first group spending more money - they spend less. The average total spending, both public and private sector spending of the higher longevity countries is €2,920 per person per annum. Total spending in the second group is higher at €3,066 per annum.

Public health spending in these EU countries is clearly more efficient than private health spending.

Furthermore, it is clearly more efficient in terms of treatment and care. The average life expectancy at birth (women and men combined) is exactly the same for both groups at 79.5 years (Table 1.1.1). But the average healthy life years expectancy for the first group is 68.0, while for the second group it is just 56.9, with none above 60 healthy life years. These are enormous differences in tens millions of people’s lives.

Source of Inefficiency

It is well-known that the US healthcare system is almost entirely private. As SEB has previously pointed out, the US system is much more inefficient than the NHS - with the same life expectancy and proportionally the same number of health care professionals, while devoting almost twice as much of GDP to healthcare spending .

A recent explanation for part of this discrepancy comes from The Economist magazine, which has great relevance for the current attack on the NHS from the Tory-led government. It argues that the centralisation of drug approval and purchasing by public bodies is vastly more efficient. The alternative US system means private sector drug producers are spend enormous sums marketing their products to a decentralised multitude of purchasers, equivalent to local GP consortia in this country. These costs are of course passed on, and the drug purchased is frequently the one with the largest marketing budget, not the most effective one. This inefficiency is replicated at every level of input for the private US healthcare system

The principles of public sector relative efficiency apply to the delivery of virtually all public goods, not just health, but also education, housing, transport, infrastructure and services such as post and banking. Marketising and privatising the NHS is not only a threat to the quality of healthcare for millions of people, but a hugely inefficient step backwards.

4 comments:

Anonymous said...

You have misunderstood what R^2 means

A R^2 value of 1.0 describes a perfect correlation between the two variables.

Your value of 0.3 is a very poor correlation.

A R^2 of 0.5 is little better and certainly not a "perfect correlation" as you claim.

Nor can you infer the strength of the contribution of the variables in comparison to other variables, i.e. your statement "higher spending accounts for two-thirds of the difference in life expectancy" may or may not be true but your graph provides no evidence to support this claim.

See
http://en.wikipedia.org/wiki/R-squared

JW said...

An R^2 of 0.33 says that 33% of the variation in the variable to be explained is explained by the explanatory variable. That is, a "perfect correlation" would be 1.00

I love SEB, but this is the real basics - not stuff to be getting wrong.

Anonymous said...

The interpretation of the statistics is wrong.The R2 coefficient of determination is a statistical measure of how well the regression line approximates the real data points. An R2 of 1.0 indicates that the regression line perfectly fits the data - not 0.5.
A value of 0.33 suggests at best that 33% of variation in the HLY is "explained" by spending per head. Simiarly the line is a function chosen by the researcher - we are given no information as to why that particular line was picked. So saying that points above the line are better that those below needs more justification.

peter said...

Very useful analysis - thanks. I have maybe a naive question about the oft repeated assertion that, because healthcare is ever more expensive (increased life expectancy, more expensive high-tech treatments etc.), we've reached a point, or soon will, where 'we' simply can't afford to publically fund it any longer? Here in Australia as elsewhere, this is the unexamined 'realist' view. I've yet to come across a rebuttal, or an analysis of the costs (which have grown? what are the options?). I'd be grateful for any pointers. This seems to me to be step 1 in defending public provision of healthcare. thanks Peter