Journal of Health http://hsr.sagepub.com/ Services Research & Policy
Why is health care inflation greater than general inflation? Anita Charlesworth J Health Serv Res Policy published online 16 April 2014 DOI: 10.1177/1355819614531940 The online version of this article can be found at: http://hsr.sagepub.com/content/early/2014/04/15/1355819614531940 A more recent version of this article was published on - Jun 19, 2014
Published by: http://www.sagepublications.com
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J Health Serv Res Policy OnlineFirst, published on April 16, 2014 as doi:10.1177/1355819614531940
Editorial
Why is health care inflation greater than general inflation?
In the UK, spending on health care has increased by around 4% a year since the National Health Service (NHS) was founded 65 years ago.1 This is much faster than the rate of economic growth in the country, and as a result, the health service has accounted for an increasing share of Gross Domestic Product (GDP). This is not unique to the UK; across the world, health care spending (public and private) has consistently outpaced economic growth.2 Part of the reason for rising health care spending is that costs have been increasing at a rate that has tended to outpace general inflation.3 Over the last 20 years, general inflation in the UK, measured either by the consumer prices index or a measure of the whole economy (GDP deflator), averaged just over 2% a year; yet, health services costs rose by 3.6% a year.4 However, since the economic crisis in 2008, the relationship between general inflation and NHS costs seems to have changed. Over the last five years, NHS costs have increased on average at 2.5% a year, the same as the GDP deflator.5 The choice of measure of general inflation matters when the UK government seeks to defend its promise to maintain ‘real terms growth’ in NHS spending. It chooses to compare the increase in NHS spending with inflation in the whole economy (the GDP deflator) rather than with increases in the cost of inputs to the NHS. This is not necessarily wrong. Comparing spending with economy wide inflation is important from the perspective of the taxpayer as it reflects the real contribution made to increasing NHS resources. But, for the NHS, what matters is the volume increase in resources, i.e. how much is left for patient care after taking account of changes in NHS pay and prices. Over the last 20 years, the volume of inputs that the NHS has been able to buy has grown more slowly than the growth in its spending. Paradoxically, it doesn’t seem that input costs to the NHS are getting relatively more expensive than input costs in other parts of the economy. The NHS pay and price index measures changes in the unit cost of NHS staff and the unit costs of goods and services bought by the NHS (these include drugs, medical equipment, utilities and cleaning contracts). If we look at these two key elements of the NHS pay and price index, then cost
Journal of Health Services Research & Policy 0(0) 1–2 ! The Author(s) 2014 Reprints and permissions: sagepub.co.uk/journalsPermissions.nav DOI: 10.1177/1355819614531940 jhsrp.rsmjournals.com
pressures look pretty similar to cost pressures in the rest of the economy.5 The goods and services component of health service inflation has tended to increase at a similar rate to the general rate of inflation in the economy (1.8% a year compared with an average annual increase in the GDP deflator of 2.2% a year). Staff costs are the other component and accounts for around half of all spending on health services. NHS pay is set in a very different way to pay in most of the private sector as it is determined by national, independent pay review bodies which take into account a range of factors including the government’s view of affordability. Despite these very different pay setting mechanisms, in the longer term, trends in NHS pay appear to track pretty closely wage trends for comparably skilled workers in the wider economy. For example, although NHS pay increased through the last decade, with particularly large increases when new contracts were introduced in 2004, for the decade up until 2011–2012 doctors pay broadly tracked the change in earnings of all full-time employees on the 97th percentile of earnings.6 So health care workers pay did not rise at a higher rate than equally skilled workers in other sectors of the economy. If overly generous pay awards are not the explanation, what is? Looking at workforce trends there are two possible reasons for the apparently higher inflation. First, across the labour market, pay rates for highskilled workers have risen faster than for low-skilled workers, and the health care sector has a higher proportion of high-skilled workers than the average.7 Sectors which use a higher proportion of more skilled workers will have seen their relative labour cost rise unless they have been able to reduce the amount of labour used to produce the goods or services that they make. Sectors differ markedly in the extent to which technological advance allows them to reduce the labour input to production. In advanced manufacturing, new technologies often substitute for human input such that prices for manufacturing actually fell in recent decades.8 In services across the public and private sector, technological change is more likely to augment rather than substitute for human input.9 The second important trend concerns the skill mix of the NHS workforce – it is using an ever greater proportion of highly skilled staff to deliver care. The most
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qualified occupations have seen the largest proportionate growth in staff numbers since 1994–1995.8 Alongside this, skill levels within staff groups are increasing, most notably within nursing. In 1997, 10% of nurses were educated to degree level, but by 2010, this had risen to 40%.8 Such skill deepening will increase the average cost per employee. This is not to say that this is poor value for money. It may have led to improvements in the quality and efficiency of care, but the NHS pay and price index only measures the changes in the cost of inputs; it does not take into account changes in the quantity or quality of output. While the NHS inflation index, which measures the volume of inputs the NHS can buy, is important, it is not the whole story. From a patient perspective, what really matters is whether the amount of care provided has been increasing in line with the increase in resources available. To assess this, we need to look at the change in the overall cost of providing a package of care. For that we need to know if there have been productivity improvements to offset rising input costs. In England, the NHS has a good story to tell in this regard.10 Additional spending on health care has bought more health care and better quality care. For example, since 2004/2005, planned hospital admissions have risen by almost a third and the 30-day survival rate for emergency patients rose from 95.16% to 96.12% despite the NHS treating an increasing number of very elderly patients. Overall NHS productivity has been increasing by an average of more than 1% a year.4 Even this may be an underestimate of productivity as it depends on how much weight is given to improvements in quality and the extent to which all dimensions of quality are measured.11 The challenge for the NHS is that for the last few years health care inflation has been low by historic standards as the public sector pay policy has held down wage growth throughout the public sector. This was only possible because productivity growth and wage pressures in the wider economy were low.
As economic growth returns, productivity and wages will increase and as a result pressure for NHS pay increases will build. References 1. Roberts A, Marshall L and Charlesworth A. A decade of austerity: the funding pressures facing the NHS from 2011/ 12 to 2021/22. London: Nuffield Trust, 2012. 2. OECD. Health data at a glance 2013, http://www.oecd.org/els/health-systems/health-at-a-glance.htm OECD (2013, accessed April 2014). 3. Baumol WJ. The cost disease – why computers get cheaper and health care doesn’t. Yale: Yale University Press, 2012. 4. Treasury HM. Latest GDP deflators. London: HM Treasury, 2014. 5. Department of Health. Finance manual 2013. HCHS pay and price series 2011/12, http://www.info.doh.gov.uk/ doh/finman.nsf/af3d43e36a4c8f8500256722005b77f8/ fb353d2bdac0c38680257b6c005032c7?OpenDocument (2013, accessed 8 January 2014). 6. DDRB. Review body on doctors’ and dentists’ remuneration. Forty-first report 2013, DDRB, 2013. 7. Cribb J, Disney R and Sibieta L. The public sector workforce: past, present and future. IFS briefing note, BN145, February 2014. London: Institute for Fiscal Studies. 8. OECD. Divided we stand. Why inequality keeps rising, http://www.oecd.org/els/soc/dividedwestandwhyinequalitykeepsrising.htm OECD (2011, accessed April 2014). 9. Brinkley I. Manufacturing and the knowledge economy. A knowledge economy programme report. London: The Work Foundation, 2009. 10. Bojke C, Castelli A, Grasic K, et al. Productivity of the English National Health Service from 2004/5: updated to 2011/12. CHE Research paper 94, January 2014. York: University of York. 11. Black N. Declining health-care productivity in England: the making of a myth. Lancet 2012; 379: 1167–1169.
Anita Charlesworth Nuffield Trust, London W1G 7LP, UK Email: [email protected]
Downloaded from hsr.sagepub.com at UNIV MASSACHUSETTS BOSTON on November 9, 2014
Why is health care inflation greater than general inflation? Anita Charlesworth J Health Serv Res Policy published online 16 April 2014 DOI: 10.1177/1355819614531940 The online version of this article can be found at: http://hsr.sagepub.com/content/early/2014/04/15/1355819614531940 A more recent version of this article was published on - Jun 19, 2014
Published by: http://www.sagepublications.com
Additional services and information for Journal of Health Services Research & Policy can be found at: Email Alerts: http://hsr.sagepub.com/cgi/alerts Subscriptions: http://hsr.sagepub.com/subscriptions Reprints: http://www.sagepub.com/journalsReprints.nav Permissions: http://www.sagepub.com/journalsPermissions.nav
Version of Record - Jun 19, 2014 >> OnlineFirst Version of Record - Apr 16, 2014 What is This?
Downloaded from hsr.sagepub.com at UNIV MASSACHUSETTS BOSTON on November 9, 2014
XML Template (2014) [12.4.2014–3:19pm] //blrnas3/cenpro/ApplicationFiles/Journals/SAGE/3B2/HSRJ/Vol00000/140013/APPFile/SG-HSRJ140013.3d
(HSR)
[1–2] [PREPRINTER stage]
J Health Serv Res Policy OnlineFirst, published on April 16, 2014 as doi:10.1177/1355819614531940
Editorial
Why is health care inflation greater than general inflation?
In the UK, spending on health care has increased by around 4% a year since the National Health Service (NHS) was founded 65 years ago.1 This is much faster than the rate of economic growth in the country, and as a result, the health service has accounted for an increasing share of Gross Domestic Product (GDP). This is not unique to the UK; across the world, health care spending (public and private) has consistently outpaced economic growth.2 Part of the reason for rising health care spending is that costs have been increasing at a rate that has tended to outpace general inflation.3 Over the last 20 years, general inflation in the UK, measured either by the consumer prices index or a measure of the whole economy (GDP deflator), averaged just over 2% a year; yet, health services costs rose by 3.6% a year.4 However, since the economic crisis in 2008, the relationship between general inflation and NHS costs seems to have changed. Over the last five years, NHS costs have increased on average at 2.5% a year, the same as the GDP deflator.5 The choice of measure of general inflation matters when the UK government seeks to defend its promise to maintain ‘real terms growth’ in NHS spending. It chooses to compare the increase in NHS spending with inflation in the whole economy (the GDP deflator) rather than with increases in the cost of inputs to the NHS. This is not necessarily wrong. Comparing spending with economy wide inflation is important from the perspective of the taxpayer as it reflects the real contribution made to increasing NHS resources. But, for the NHS, what matters is the volume increase in resources, i.e. how much is left for patient care after taking account of changes in NHS pay and prices. Over the last 20 years, the volume of inputs that the NHS has been able to buy has grown more slowly than the growth in its spending. Paradoxically, it doesn’t seem that input costs to the NHS are getting relatively more expensive than input costs in other parts of the economy. The NHS pay and price index measures changes in the unit cost of NHS staff and the unit costs of goods and services bought by the NHS (these include drugs, medical equipment, utilities and cleaning contracts). If we look at these two key elements of the NHS pay and price index, then cost
Journal of Health Services Research & Policy 0(0) 1–2 ! The Author(s) 2014 Reprints and permissions: sagepub.co.uk/journalsPermissions.nav DOI: 10.1177/1355819614531940 jhsrp.rsmjournals.com
pressures look pretty similar to cost pressures in the rest of the economy.5 The goods and services component of health service inflation has tended to increase at a similar rate to the general rate of inflation in the economy (1.8% a year compared with an average annual increase in the GDP deflator of 2.2% a year). Staff costs are the other component and accounts for around half of all spending on health services. NHS pay is set in a very different way to pay in most of the private sector as it is determined by national, independent pay review bodies which take into account a range of factors including the government’s view of affordability. Despite these very different pay setting mechanisms, in the longer term, trends in NHS pay appear to track pretty closely wage trends for comparably skilled workers in the wider economy. For example, although NHS pay increased through the last decade, with particularly large increases when new contracts were introduced in 2004, for the decade up until 2011–2012 doctors pay broadly tracked the change in earnings of all full-time employees on the 97th percentile of earnings.6 So health care workers pay did not rise at a higher rate than equally skilled workers in other sectors of the economy. If overly generous pay awards are not the explanation, what is? Looking at workforce trends there are two possible reasons for the apparently higher inflation. First, across the labour market, pay rates for highskilled workers have risen faster than for low-skilled workers, and the health care sector has a higher proportion of high-skilled workers than the average.7 Sectors which use a higher proportion of more skilled workers will have seen their relative labour cost rise unless they have been able to reduce the amount of labour used to produce the goods or services that they make. Sectors differ markedly in the extent to which technological advance allows them to reduce the labour input to production. In advanced manufacturing, new technologies often substitute for human input such that prices for manufacturing actually fell in recent decades.8 In services across the public and private sector, technological change is more likely to augment rather than substitute for human input.9 The second important trend concerns the skill mix of the NHS workforce – it is using an ever greater proportion of highly skilled staff to deliver care. The most
Downloaded from hsr.sagepub.com at UNIV MASSACHUSETTS BOSTON on November 9, 2014
XML Template (2014) [12.4.2014–3:19pm] //blrnas3/cenpro/ApplicationFiles/Journals/SAGE/3B2/HSRJ/Vol00000/140013/APPFile/SG-HSRJ140013.3d
(HSR)
[1–2] [PREPRINTER stage]
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Journal of Health Services Research & Policy 0(0)
qualified occupations have seen the largest proportionate growth in staff numbers since 1994–1995.8 Alongside this, skill levels within staff groups are increasing, most notably within nursing. In 1997, 10% of nurses were educated to degree level, but by 2010, this had risen to 40%.8 Such skill deepening will increase the average cost per employee. This is not to say that this is poor value for money. It may have led to improvements in the quality and efficiency of care, but the NHS pay and price index only measures the changes in the cost of inputs; it does not take into account changes in the quantity or quality of output. While the NHS inflation index, which measures the volume of inputs the NHS can buy, is important, it is not the whole story. From a patient perspective, what really matters is whether the amount of care provided has been increasing in line with the increase in resources available. To assess this, we need to look at the change in the overall cost of providing a package of care. For that we need to know if there have been productivity improvements to offset rising input costs. In England, the NHS has a good story to tell in this regard.10 Additional spending on health care has bought more health care and better quality care. For example, since 2004/2005, planned hospital admissions have risen by almost a third and the 30-day survival rate for emergency patients rose from 95.16% to 96.12% despite the NHS treating an increasing number of very elderly patients. Overall NHS productivity has been increasing by an average of more than 1% a year.4 Even this may be an underestimate of productivity as it depends on how much weight is given to improvements in quality and the extent to which all dimensions of quality are measured.11 The challenge for the NHS is that for the last few years health care inflation has been low by historic standards as the public sector pay policy has held down wage growth throughout the public sector. This was only possible because productivity growth and wage pressures in the wider economy were low.
As economic growth returns, productivity and wages will increase and as a result pressure for NHS pay increases will build. References 1. Roberts A, Marshall L and Charlesworth A. A decade of austerity: the funding pressures facing the NHS from 2011/ 12 to 2021/22. London: Nuffield Trust, 2012. 2. OECD. Health data at a glance 2013, http://www.oecd.org/els/health-systems/health-at-a-glance.htm OECD (2013, accessed April 2014). 3. Baumol WJ. The cost disease – why computers get cheaper and health care doesn’t. Yale: Yale University Press, 2012. 4. Treasury HM. Latest GDP deflators. London: HM Treasury, 2014. 5. Department of Health. Finance manual 2013. HCHS pay and price series 2011/12, http://www.info.doh.gov.uk/ doh/finman.nsf/af3d43e36a4c8f8500256722005b77f8/ fb353d2bdac0c38680257b6c005032c7?OpenDocument (2013, accessed 8 January 2014). 6. DDRB. Review body on doctors’ and dentists’ remuneration. Forty-first report 2013, DDRB, 2013. 7. Cribb J, Disney R and Sibieta L. The public sector workforce: past, present and future. IFS briefing note, BN145, February 2014. London: Institute for Fiscal Studies. 8. OECD. Divided we stand. Why inequality keeps rising, http://www.oecd.org/els/soc/dividedwestandwhyinequalitykeepsrising.htm OECD (2011, accessed April 2014). 9. Brinkley I. Manufacturing and the knowledge economy. A knowledge economy programme report. London: The Work Foundation, 2009. 10. Bojke C, Castelli A, Grasic K, et al. Productivity of the English National Health Service from 2004/5: updated to 2011/12. CHE Research paper 94, January 2014. York: University of York. 11. Black N. Declining health-care productivity in England: the making of a myth. Lancet 2012; 379: 1167–1169.
Anita Charlesworth Nuffield Trust, London W1G 7LP, UK Email: [email protected]
Downloaded from hsr.sagepub.com at UNIV MASSACHUSETTS BOSTON on November 9, 2014
