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Do you remember the time when healthcare professionals used to argue that the NHS was adequately funded, and that further injections of money were not needed? Me neither, because there never was such a time. The NHS has always been “underfunded”, and the solution to its woes has always been just a few billion pounds away. 

Healthcare is a bottomless pit, and this is partly an inherent feature, common to all health systems. There is only so much we can sensibly spend on, say, national defence, but we could, in theory, spend our entire GDP on healthcare in sensible ways. Partly, the permanent “funding crisis” is also a result of our financing arrangements. Since British consumers are insulated from the cost of healthcare, there is little demand for cost-cutting innovations, so such innovation rarely occurs. In the long run, what is free at the point of use is bound to become very expensive at the point of non-use.

But while the NHS has, in this sense, always been “in crisis”, demographic pressures will inevitably aggravate this tendency over the coming years and decades. Today, we still have about four people of working age for every person aged 65 or over. Due to a combination of low birth rates and rising life expectancy, that ratio is forecast to rise to 3:2 by the end of the 2030s. It has long been recognised that this will create massive problems for our pension system, but the impact on our health system is no less severe. Healthcare costs rise steeply with age. They are more or less constant in the first five decades of life, but then begin to rise exponentially. Per capita healthcare spending for people in their late 70s is almost five times as high as for people in their 20s, 30s and 40s. 

Rather than wait for health expenditure to gallop away, it would be far more sensible to make provision in time. The root-and-branch solution would be to move from the current pay-as-you-go financed health system (in which the working-age generation funds the healthcare costs of the elderly) to a prefunded one (in which every generation pays its way). 

Here’s how it would work. Healthcare financing agencies – Clinical Commissioning Groups (CCGs) in the current setup, or whatever they will be called after the next reorganisation – would be required to build up old-age reserves for the people registered with them. Much like a pension fund, those reserves would accumulate over people’s working lives, to be drawn upon when they retire. 

It is not a particularly exotic idea: private for-profit health insurers in Germany, which cover about 8m people, already operate in this way. Taken together, they have accumulated over €170bn in old-age reserves. One could describe this as a two-pillar system: health expenditure is partly paid out of current premium revenue, and partly by drawing on the old-age reserve fund. As the proportion of elderly people grows, the old-age fund grows alongside, making the system much more resilient to demographic changes. The building up of reserves also raises the savings rate, boosting investment and growth. 

Sure, the details would differ, but in principle there is no reason why this funding method should not also work for the NHS. Managing the transition to a prefunded system would be no mean feat. The NHS currently has no old-age reserves whatsoever, so they would have to be built up from scratch. The sun is no longer shining, but it would still be better to fix the roof in the current drizzle than in the coming torrent. 

 

Dr Kristian Niemietz (@K_Niemietz) is the IEA's Head of Health and Welfare. He is the author of the IEA publications “What are we afraid of?” and “Health check”. This article first appeared in City AM.

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As in all IEA publications, the views expressed in this blog are those of the authors and not those of the Institute (which has no corporate view), its managing trustees, Academic Advisory Council or senior staff.

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