How much is the 'NHS market system' costing?

Published: 31st Mar 2014

"We're wasting £10 billion a year at the moment in the English NHS on a market system that nobody wants except the private sector." Dr Jacky Davis on BBC Radio 4 Today, 31 March 2014. 

The think tank Reform proposed today a £10-a-month NHS membership charge - one of a number of measures it thought could improve NHS funds. Dr Jacky Davis, co-author of campaign group NHS SOS, criticised the perceived trend towards 'market-centred' funding.

Dr Davis estimated that this approach had a £10 billion annual cost attached, based on a calculation of the difference in administration costs in the 1980s compared to the modern day. But estimates vary, are difficult to trace, and provide no guarantee of comparability across the years.

A full analysis of the financial impact would also need to take into account the possible benefits of the changes: in reality, there's no robust way to quantify either.

Rough estimates of administration costs

The National Health Service and Community Care Act in 1990 first introduced the 'internal market', where health authorities were able to manage their own budget. The internal market system was adapted recently by the Health and Social Care Act in 2012, which put GPs in charge of budgets via Clinical Commissioning Groups.

Dr Davis told us that her cost estimate was based on the increase in NHS administration costs since the market system was introduced. She said these had increased from 6% of NHS spending before the internal market, to about 15% now. The 9% difference amounts to £10.9 billion of the 2012-13 NHS resource spending total of £121.4 billion.

However there are problems with this approach.

The Department of Health has previously published estimates of administration costs going back to 1996-97, which put them at 4.9% in 2004-05 and 6.1% back in 1996-97. However it is explicit in saying that these aren't directly comparable, so we have no official figures to compare across the years.

The Department's figures were also criticised by the House of Commons Health Commitee in 2010, who said the estimates lacked clarity and consistency.

Instead, the Committee referred to a figure of 5% pre-1980s, citing a book by Dr Charles Webster (The National Health Service: A Political History (2002)). For a more recent estimate, it quoted a figure of 13.5% of overall NHS expenditure spent on "management and administration salary costs" from a York University report written in 2005. The report was apparently commissioned by the Department of Health, but never published, so all we have to go on is the quote in the Committee's report - which refers to the figure as "a very crude approximation".

The only other estimate we could find (from 1995) of the pre-1980s administration costs put it at between 5% and 6%, and said that they had since doubled.

An alternative estimate: around £4.5 billion

Dr Davis is not the only person to try to estimate the annual financial burden placed on NHS budgets by administration costs. A report published in February 2014 for the Centre for Health and the Public Interest estimated that there were recurring costs of at least £4.5 billion a year. It pointed out that around half of the increase in administration costs noted by the Health Committee and others could be attributed to changing definitions of what counts as an administration costs, and adjusting for this and other factors, the total fell to £4.5 billion.

Possible recent savings in administrative costs

The only other way that we can attempt to quantify cost implications from the market system is looking at the more recent changes. The Government's Impact Assessment of the 2012 Health and Social Care Act actually estimated that the commissioning reforms would bring about a reduction in the administrative costs by about a third, in real terms - or around £1.07 billion per annum. Whether or not these savings will materialise in practice remains to be seen.


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