Quality Assurance in Health Care. Vol. 4. No. 4. pp. 263-272. 1992 Primed in Great Britain

1040-6166/92 $5.00 + 0.00 Pergamon Press Ltd

REVIEW THE REFORM OF THE NATIONAL HEALTH SERVICE Brian Abel-Smith Professor of Social Administration London School of Economics and Political Science London, UK (Submitted 29 April 1992; accepted 6 June 1992)

After a long period of growth and relative organizational stability, the last 10 years have been a period of reappraisal. One driving force has been the desire of governments simply to contain health care costs. Another has been the search to find ways of obtaining better value for money. Thus, the reforms of the British National Health Service should be seen in an international context. Britain is by no means alone in introducing changes which would have been thought inconceivable only 10 years ago. Sweden has, of course, also been introducing changes. And it may be that there will be more to follow. The changes in Britain should be seen as a process, starting essentially from 1984. The Thatcher White Paper in 1989 was the culmination of it. Essentially the changes consist of an attempt to bring private business methods into the running of the health services while still retaining the essential principles of medical services being largely free at the point of use and intended to offer equal access to all citizens. It has been, in part, a change of control from bodies representing different interests to control by bodies established on similar lines to the Board of Directors of a public company and acting as such. THE BACKGROUND The changes cannot be understood without a knowledge of what the Thatcher government inherited in 1979. The earlier pattern of administration had largely been devised by the previous Conservative government of 1970-1974 under Prime Minister Heath, but many features dating back to 1948 and earlier were retained. The organization separated control of the family doctor and associated services from control of the hospital and community services. The contracts for family doctors and pharmacists were determined centrally but the task of administering the contracts at Paper given to the Swedish Society for Quality Assurance in Health Care, Stockholm, 29 April 1991.



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the local level rested with bodies ("Family Practitioner Committees") consisting one half of representatives of the providers concerned and one half of local people appointed for the purpose with a chairman to keep the peace. Inevitably, the professional representatives were in a positidn to exercise strong veto power on actions which might be taken which challenged their interests or those of a minority : of their members. , General practitioners were paid in a very complex way. They were self-employed professionals, yet part of their payment came from allowances (which in any other context would have been called salaries) varying according to length of service, location, working as a group of doctors and other factors. Part came in capitation payments (about 45%) and part came from fees for defined preventive work (such as immunization), for seeing patients out of normal working hours and seeing patients away from home and the general practitioner with which they were registered. In addition, they had their rent re-imbursed and also two-thirds of the salary of supporting staff whom they could appoint (normally a receptionist and a nurse). There was in effect no retiring age, though pensions were paid from age 65. The inspection of their premises was rarely done and though there were rules about the extent to which they could "deputize" their out of normal working hours to commercial agencies, these rules were not effectively enforced. There was no effective monitoring of the quality of services they provided or the convenience of access for patients. The hospital and community services (such as community nurses and health visitors) were under the control of a hierarchy of largely representative bodies with Regional Health Authorities to plan services and District Health Authorities to manage them at local level. These bodies were large (20-30 members). A quarter or more were doctors, a third represented the local government bodies of the area and typically there would be a lawyer, a nurse, a trade unionist and perhaps an accountant, a business man and an academic. Under these Authorities or boards were the permanent officials who were, in the case of the district, the administrator, the finance officer, the senior nurse, the community physician and representatives of the clinical doctors who were expected to reach a consensus on the advice they gave to the Authority. This system was hardly likely to lead to strong management but usually a strong-minded member of the group would emerge whose advice was generally followed. THE EARLY CHANGES The first major change came in 1984 when, on the advice of one of the general managers of one of our large food retailing chains, general managers replaced, this consensus of senior officers. The manager is appointed for a 3-year term but can be re-appointed. It was hoped that many of these positions would be occupied by applicants from the private sector of business but this has rarely happened. Most of these positions came to be occupied by trained administrators from within the Service. The second change came in 1988. The idea was to expose general practitioners to more competition by increasing the share of their pay which came from capitation payments. The change achieved was modest; an increase in their role from 45 to 55%



of pay. At the same time, higher rates were paid in deprived areas of the country. A further change, following a White Paper in 1987 [1], was that, instead of being paid for each immunization or cervical smear, targets were introduced for general practitioners by which a lump sum was paid for achieving 70% of children immunized or 50% of women aged 25-64 given a cervical smear, and a much larger sum for achieving 90% or 70%, respectively. In addition, payments were introduced for preventive clinics such as anti-smoking clinics. The intention was to give greater priority to preventive work and this aim was often achieved. But it was least likely to be achieved in poorer areas where it was verydifficult to reach even the lower targets because of rapid population movement and the difficulties facing patients in attending practices. Finally a retirement age of 70 was introduced.

UNDER-FINANCING The issue which dominated discussion of the National Health Service in the media, fed largely by representatives of the hospital doctors, was "the under-financing of the health service". It was generally accepted, even by the government, that 2% real growth a year was the minimum needed in real terms to provide for the ageing population, the introduction of new technology and to achieve some of the objectives which the government had set for the Service. Over the past decade, the government has been unwilling to grant this, confronted as they have been with the cost of supporting millions of unemployed and hoping that reducing public expenditure would help to stimulate economic growth and control inflation. Over the whole 6 years between 1982/3 and 1988/9 the hospital and community services were only given about 3% real growth or about 1/2% per year. The consequences were politically embarrassing: hospital wards closed through lack of funds while the number of patients recorded as waiting for admission to hospital steadily increased until the total approached 100,000 persons. Experience suggested that this problem could not be solved simply by throwing money at it, at least in the quantities that the government was willing to consider . Meanwhile, the delays in obtaining care in the National Health Service hospitals and their perceived inadequacies had led to a considerable growth of well-equipped private hospitals financed mainly by private health insurance which grew to cover over 10% of the population. The trend was encouraged by giving every specialist in the National Health Service the right to do a limited amount of private practice. The government encouraged health authorities to make contracts with these hospitals in the hope of reducing waiting lists. The government focused its attention on the apparent evidence of inefficiencies in a service where the doctor responsible could determine what resources were used on each patient. These were quoted in Mrs Thatcher's paper setting out her proposed reform [2]: "In 1986-7, the average cost of treating acute hospital in-patients varied by as much as 50 per cent between different health authorities, even allowing for the complexity and mix of cases treated. Similarly, a patient who waits several years for an operation in one place might get the same operation within a few weeks in another. There are wide variations in the drug prescribing habits of general practitioners, and in some places drug costs are nearly twice per head of population as in others. And, at the extremes, there is a twenty-fold variation in the rate at which general


B. Abel-Smith practitioners refer patients to hospital. The government wants to raise the performance of all hospitals and general practitioner practices to that of the best".

This was to be done by giving "greater satisfaction and rewards for those working in the National Health Service who successfully respond to local needs and preferences".


The reforms, which came into effect on 1 April 1991, swept away the representative bodies which had previously controlled both the family practitioner services and the hospital services. All became small health authorities of about 10 persons consisting of executive directors—full-time officers from the service—and part-time non-executive directors. The representatives of the professions were in the future to play no part at this level. This change, by itself, transformed the local administration of the general practitioner services. Instead of being on the whole non-interventionist bodies, they suddenly became active in inspecting the services for which they were responsible. General practitioners with inadequate premises, such as no proper toilets for patients or inadequate facilities for examining patients could be threatened with the withdrawal of their rent subsidy and the carrot dangled of interest-free loans to make improvements. The use of deputizing services and access for patients became actively monitored. In the course of time this change alone will clean up some of the more obvious deficiencies of a minority of practices. In the case of the hospital and community services there were three main strands to the reforms: 1. Instead of District Health Authorities controlling their hospitals, they have to contract for services after seeking bids from both public and private hospitals taking account of both price and quality. To create fair competition between public and private hospitals, the capital locked up in the public hospitals had to be valued so that they could pay a depreciation charge. To do this was by no means easy [3]. 2. The larger groups of general practitioners which together look after at least 9000 patients are able to receive budgets out of which they pay for the main services needed by their patients, including specialist consultations, tests and a large range of inpatient care. These budgets will eventually be based on the size and characteristics of the patients for whom they are responsible: an extended capitation system. If these so-called "fundholding practices" make a surplus at the end of the year they will be able to carry it forward or spend it on improving their practices. In addition, all general practitioners are to be given indicative budgets for their prescribing. Ultimately, financial penalties will be imposed on general practitioners "who persistently refuse to curb excessive prescribing". 3. The larger hospitals have been allowed to become "trusts" within the public sector with the trustees appointed by the government. The idea was to give them independence from many of the bureaucratic rules of the health service. They can: —provide health services through contracts with a wide range of providers, —set local terms and conditions of staff, —acquire and dispose of land and property within limits,



—generate income in a variety of ways, —borrow money subject again to limits. One of the key stated aims of the reform was to extend patient choice. But it is hard to square this objective with the actual reforms introduced. Choice is clearly to be exercised by the districts and the general practice fundholders. It is to be exercised on behalf of, and not by, patients. Indeed patient choice of hospital is likely to be restricted rather than increased as patients will normally only be able to go to hospitals with which districts or fundholders have contracts. The ideas underlying the reforms are not new. The idea of having an internal market by separating contractors and providers had been proposed in an influential paper by Alain Enthoven in 1985 [4]. And Professor Maynard had proposed what essentially were fundholding practices in 1986 [5], arguing from theory that, given the limited knowledge of health care among users, general practitioners were best equipped to act as skilled buyers on behalf of their patients. And a study of HMOs in the United States had led to the Department of Health considering how the essential ideas might be incorporated in the National Health Service. It is curious that the government decided to go for both approaches all over the country at the same time: districts as buyers of services and fundholding practices as buyers of services. Presumably this was a compromise between competing views on the best way ahead. Not surprisingly, the publication of the government's radical proposals, with a foreword by the Prime Minister herself (unprecedented for a health policy statement) led to a storm of opposition. The general practitioners could see that the door was opened to intervene in their affairs. Budgets for prescribing were for them a very hot issue. The British Medical Association wrote to all practices urging them not to participate in fundholding. The specialists could see that they would in future be judged by the costs they generated. In the long run the new trusts could be expected to reward specialists who used resources economically and select and retain new specialists on the basis of their economic performance. The trade unions could see that the national salary scales which they had negotiated over the years would, in the case of trusts, be subject to local bargaining. The teaching hospitals foresaw the dispersal of the teaching function. How would it be possible to cover the whole curriculum if the teaching hospital won the contract for treating some diagnoses but not others? Hastily, the latter were re-assured that they would be protected in this respect. Academic commentators, the health authorities and the health administrators pressed the government to try out their ideas in one or more experimental areas, before imposing them on the whole country (see Ref. [6] for example). Moreover, it was pointed out that the information base did not exist to operate such a system; time would be needed to develop it. But the government refused to consider initial local experiments on the grounds that pilot studies would do nothing but delay implementation and could be used to obstruct the changes. THE FIRST YEAR OF IMPLEMENTATION Districts and Trusts

Faced with the very real difficulties of implementing the proposals, the Department of Health wisely decided to act gradually towards reaching the long term aims


B. Abel-Smith

stated in the White Paper. In particular it was stressed that they expected a "steady state" in the first year. In other words purchasers were expected to use the same hospitals as in the previous year, but do so in the "contract mode". Trusts have been established with more to follow. The criterion of whether a hospital was allowed to become a trust depended on an assessment of its management capability. The division of role between District Authorities and the remaining district hospitals has been articulated, but the actual contracts have had to be largely bulk contracts, not unlike the budgets that preceded them, except that certain clear undertakings are expected of the hospital entering into the contract. Thus, specifications may be laid down to reduce waiting time for outpatients or to. improve the notification of patients waiting for admission. Only in the case of the more expensive specialities are contracts more specific. In fact it is true to say that in this respect the main thrust of the reform has still to be introduced. In the absence of a working system of costing by diagnoses and only a partial system of costing by speciality, the changes in Districts' arrangements for services have, therefore, so far been more of language than of actual practice. The "contract mode" has led to language copied, if not from big business, at least from business schools (see Ref. [7] for example). Hospitals which had previously seen their aims, if they articulated them at all, as being to meet patients' needs in their district, now have mission statements, business plans, performance targets and operational objectives. Management attempts to see that the targets and objectives are shared and "owned" more widely. Hospitals are now expected to be performance-oriented and people-oriented. Fundholding Practices

What was not predicted was that some of the new fundholding general practices would become almost over night the innovative ring-leaders in the reforms [8]. Once they were promised budgets they were not prepared to accept the steady state guidance from the Department. Grievances, accumulated over many years, came to the surface and many general practitioners were determined to try and make the hospitals deliver the type of service they had been wanting for years. Indeed, years of resentment about the lordly way they had been treated led them to press very specific demands for improved services for themselves as well as their patients. Instead of suffering silently lest too active complaint would make things worse rather than better, they now knew that they were in a position to use the power of the purse. Gradually and painfully the hospitals have had to recognize and adjust to this sudden reversal of power relationships. The Department had to make up the rules governing fundholding practices as they went along and they made it more and more attractive for practices to join. It was recognized that most practices were too small to be able to spread risks for health care. For this reason it is calculated that a HMO in the USA needs to have at least 30,000 or 50,000 patients to avoid the risk of bankruptcy from having one very expensive patient. The Department met this argument by saying that the district would pick up the bill for the costs for any one patient in excess of £5000. Accordingly, it was decided that a practice with 9000 patients (originally it had been 11,000) would be eligible to be considered for fundholding. Applying was voluntary but a small survey [8] indicates some of the reasons for



those that chose to reply. One was acute dissatisfaction with the services they had been receiving from some hospitals or some specialists within them. They were determined to send their patients to a better, if more distant, consultant where they would get better services. A second was the desire to be able to continue to send their patients to the hospitals they chose and not be largely hedged in by the contracts districts made on their behalf. A third was to be able to extend the services they offered on their own premises and control their own spending patterns. Practices were selected according to their management capacity and staff, their space for further staff, the development of their computerized record systems, and the commitment of the partners to the scheme. In practice, this meant that practices in the suburbs and small towns rather than in the stressed inner cities were most likely to apply and most likely to be accepted. Practices were given financial incentives to participate. They were given 75% of the costs of purchasing, leasing or upgrading a computer system needed to run the information side of fundholding. In addition 70% of the information staff costs of fundholding would be met and, in the preparatory year, an allowance was paid to cover the extra administration costs of preparing the practice for fundholding status. Secondly, it was finally decided that it was not practicable to allocate budgets at the start on the basis of the characteristics of patients on practices' lists. Instead, each practice was given a budget on the basis of the costs they had generated in the previous year, and it turned out that practices could piece together better information on this from their records than could be gleaned from the national statistics. Fixing budgets in this way had the advantage of minimizing disruption as practices had the resources to continue referring to the same hospitals if they wished or could make savings if they switched to less expensive providers. The result of this procedure was that the budgets which were finally agreed varied considerably per patient on the list. The small study mentioned earlier showed that the largest budget was more than 1.5 times as high per head as the smallest. Thirdly, a list of inpatient and day case procedures was issued as late as August 1990 which the budgets would have to purchase. Thus, whereas the districts were using bulk contracts and some fundholders did the same, others insisted on basing their contracts on a per case basis. This generated a lot of unwelcome work for the hospitals and the resultant cost estimates were fairly crude; the average costs for the speciality to which the procedure belonged were weighed by the average length of stay of the procedure and overheads were allocated on a pro rata basis. These calculations led to some very odd results and remarkably large variations between hospitals in the prices set for particular procedures. Most contracts specified times within which an appointment should be made, that dates of appointments should be sent to the practice by FAX, that patients should be seen within specified time limits and that they should be seen by the consultant on the first visit unless there were exceptional circumstances. All this came as a shock to the hospitals who had not expected fundholders to specify different conditions from the standard contracts of the districts. The process of contracting enabled a number of fundholders to achieve clear improvements in services for their patients. One way of doing this was by simply withdrawing their patients from a local speciality and sending them further away where the terms were more favourable in, for example, waiting time. Another was to threaten to do so, or to use a private hospital or even a specialist's private practice.


B. Abel-Smith

The latter could in fact be cheaper as overheads were lower. A common strategy was to persuade consultants to come and give their outpatient service in the GP's own surgery. From the financial point of view it now mattered to the practice when consultants arranged further visits to the hospital for review, after an inpatient stay or an initial visit as an outpatient, as the practice would have to pay for them. Thus, some practices insisted on their permission being obtained for further visits after the first one or two. There were some practices which insisted on the consultant referring back to the practice after an initial visit and reporting the recommended treatment. The general practitioner concerned would then discuss with the patient the advisability of accepting the proposed treatment or not. In some cases "shared care" was insisted upon: the consultant with the better facilities for testing would see the patient once in 3 months and the general practitioner would see the patient in the 2 intervening months. Laboratory tests have long been an area where general practitioners have felt they were given a poor service. By using a private service a practice could now get test results back on the same day by courier instead of receiving a weekly service from the hospital. The threat of using a private service was enough to make some hospital laboratories give an equally prompt service. Improving waiting times could be more difficult but where practices grouped together and bargained together they were more likely to achieve the results they wanted. Fundholding inevitably increased the incentive for practices to increase the range of services they provided themselves, and some planned to do so. But this would raise major questions about the quality and the appropriateness of the services provided. This is an issue which is bound to require attention in the future. WILL CONTRACTING AND COMPETITION INCREASE EFFICIENCY?

It can be seen from the above that the Thatcher reform is still very much in its early days. The main contracts are still bulk contracts and the initial development of contracts on a per case basis applies to only a few fundholders who have insisted on doing business on this basis. Quality of service has only so far entered the discussion in terms of the convenience of the patient, the speed with which services are received, improved information about treatment plans and improvements in the physical environment. The major question of whether it will lead to a higher or lower quality of care in terms of patient outcome and whether it will do so at higher or lower cost, allowing for the by no means insubstantial costs of the whole process of contracting, has still to be answered. Indeed, ways of measuring quality of outcome have still to be developed. One of the effects of the reforms has been to stimulate considerable research on different ways of patient costing and classifying diagnoses for costing purposes. The US diagnostic-related groups are by no means the only runners on the British scene. Similarly research has been increased on different ways of measuring outcome, though limited so far to a number of the more easily measured conditions. Those who have sifted through the large volume of literature on the effects of competition in the American health care market have emerged without a clear conviction of its advantages and with salutary warnings about the problems with



which policy-makers in Britain will have to deal with in the future (see Ref. [9] for example). Competition, we are warned, has led to competition by prestige in the United States as hospitals buy more and more expensive equipment which they under-utilize to attract top doctors. It has not led to lower costs. There is also some evidence which suggests that mortality rates are higher in highly competitive areas of the US health care market. There is much research on the effects of DRGs showing that while it has led to greater patient throughput it has also led to cost-shifting to out-of-hospital care, to patient-shifting (hospital discharge in an unstable state) and DRG-creep. One clear effect of competition has been creamskimming, insurers selecting the low health risk patients. Some well-informed Americans I have spoken to express amazement that Britain should be adopting the now discredited American panacea of a decade ago. Personally, I feel that these commentators dismiss too easily the potential advantages of competition in the British context which is by no means the same as the American. Competition will operate in Britain within overall cash limits and a limited number of co-ordinated local buyers. There is a long tradition of regulation which works, not least in the National Health Service, and can control purchases of expensive medical equipment, would be able to control cost-shifting and might even find ways of limiting cream-skimming. However this is not to say that there are not important messages from US experience about what safeguards may need to be developed in the future.

PROBLEMS IN FUTURE DEVELOPMENTS It is now clear that the Thatcher reforms will continue. A different result in the general election of 9 April 1992 would have led to the scrapping of the whole system. However, the most difficult problems have still to be resolved. Firstly, the attempt to assess and protect quality may prove very difficult in a country with no experience of accreditation, although in 1990-92 £100 million has been made available to try and build an effective system of quality assurance. Secondly, it will be extremely difficult to find a formula for distributing money to the fundholding practices which fully reflects the characteristics of their patients. The existing system of budgets based on past usage cannot be retained, as they reflect in part the inefficiencies of past practice and indeed reward them. Research in the Netherlands has found that age, sex and region are poor predictors of service use. Past medical consumption, socio-economic background and health status factors improve prediction considerably [10]. However, these variables are not readily worked into a national formula. As all general practitioners can pick and choose their patients, without a subtle formula, some are bound to attempt to "cream off" low health risk patients and "counsel out" high users of services as happens in some HMOs in the United States. Thirdly, up to the present, fundholders have been hesitant to use the private sector and have gone a considerable way to try and force National Health Service hospitals not only to comply with their standards but secure that the advantages they win are granted to other patients outside their practice. However, will these behaviours persist when competition becomes fiercer? Will there be privileged patients of fundholders and disadvantaged patients of non-fundholders?


B. Abel-Smith

Fourthly, at some stage a decision will need to be made on which is to be the main way ahead: fundholders or district purchasers. Are smaller practices going to be induced to act together as purchasers or will districts continue in a residual role, uncomfortably opening their own hospitals to fiercer competition and yet fearing the consequences if some of them fall by the wayside. In the long run the ugly prospect of hospital closure through failure in the competition will have to be faced. This will require considerable political nerve. Fifthly, how will it be possible to stop budgetholding general practitioners from attempting procedures themselves on which they lack experience, rather than pay for them to be done elsewhere? Who will decide that competence has been exceeded and how? Finally, will the doctor/patient relationship be fundamentally altered in budgetholding practices? Will patients come to believe that they are being done a favour if sent outside the practice for care and suspect that, if not sent out, it is to save the cost? So far, general practitioners have been a bit shy about informing their patients about the full implications of fundholding. CONCLUSION

From what I have said it is clear that the real challenges in showing whether the British experiment can work and produce quality care at low cost lie ahead. It would only take a few glaring instances of budgetholding practices denying necessary care (as happened with some HMOs in the USA) or of hospitals discharging patients too early with inadequate follow-up leading to avoidable death for the system to be discredited. Whether, or perhaps when, this may happen remains to be seen. Should Sweden follow the British model? Personally I think the model of fundholding primary care is attractive, if some of the difficult problems that lie ahead can be solved. It gives priority to primary care in a way in which even the drafters of the Alma Ata declaration could never have foreseen. Would contracting have a major impact on Sweden's lengths of stay which are high by international standards? I don't know the answer. So, in general, my advice on the British reforms is wait and see. REFERENCES 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Department of Health ami Social Security, Promoting better health. HMSO, London, 1987. Department of Health, Working for patients. HMSO, London, 1989. THS health summary. Vol. IX, No. 11, February 1992, p.3. Enthoven A, Reflections on the management of the NHS. Nuffield Trust, London, 1985. Maynard A, Performance Incentives. In: Health education and general practice (Ed. Teeling-Smith G). Office of Health Economics, London, 1985. Institute of Health Services Management, Working party on alternative delivery and funding of health services: final report. LHSM, London, 1988. Cottam D, Self-governing trusts are revolutionising the function of finance management. Health Service J 9 January 1992. Howard Glennerster era/., A foothold for fundholding. King's Fund Institute, 1992. Shiell A, Self-governing trusts: an agenda for evaluation. Centre of Health Economics, York University, 1991. van de Vliet R C J A and van de Ven W P M M, Towards a budget formula for competing health insurers. In: Second world congress of health economics, Zurich, Switzerland, 1990.

The reform of the National Health Service.

Quality Assurance in Health Care. Vol. 4. No. 4. pp. 263-272. 1992 Primed in Great Britain 1040-6166/92 $5.00 + 0.00 Pergamon Press Ltd REVIEW THE R...
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