Speeches

`REFORM OF THE PUBLIC SERVICES: THE BOUNDARY BETWEEN THE PRIVATE AND PUBLIC SECTORS’

Rt Hon Michael Howard QC MP, Shadow Chancellor of the Exchequer

To the Centre for Policy Studies at the Cass Business School in the City of London,

24 March 2003

Introduction

Last month Gordon Brown spoke in this auditorium to the Social Market Foundation, on the twin themes of prosperity and social reform. His aim was to set out some of the principles which should determine the roles of the private and public sectors in various aspects of economic and social policy.

Gordon Brown was right to note that `the respective role of markets and the public sector has been the underlying, even if sometimes the unspoken, divide at the heart of British political arguments for nearly a century’. 

He was also right to say that achieving the objective of an `efficient and fair Britain in which individuals can realise their potential’ demands `the courage to push forward with all the radical long term reforms necessary to enhance productivity and to improve public services’. And, as he also said, `as we do so, we must have the strength to face up to fundamental questions that cannot be sidestepped about the role and limits of government and markets - questions, in fact, about the respective responsibilities of individuals, for markets and communities including the role of the state’.

So far, so good. Gordon Brown’s speech was wide-ranging. Elsewhere in recent weeks and months I have addressed many of the issues he raised – including the monetary and fiscal policy frameworks, regulation policy, and economic reform in Europe. Today I am going to ask and seek to answer his question on the role of individuals, markets and communities in relation to reform of the public services. 

This debate is now well and truly underway. No longer are those who dare to raise such issues shouted down. No longer can those who call for greater private sector or market involvement in the public services be greeted routinely with cries of `privatisation’ from their political opponents. 

That is a welcome development. With our public services facing seemingly intractable problems, a mature debate is more urgent than ever.

And the criteria we should use in deciding the respective roles of markets and government are essentially pragmatic: `what matters’, as the Prime Minister likes to say, `is what works’. 

The criteria should not, however, be Party advantage. A more recent quotation from the Prime Minister, in an article for Progressive Politics, is as follows: `We need to think through how our political and intellectual enemies will attempt to reposition themselves. That will enable us to define the next phase of progressive politics’ (Progressive-governance.net, 2003).

I hope it is not true that the Prime Minister means to define the `next phase’ of his politics with reference not to his beliefs or the needs of the country but rather to the likely position of his `political and intellectual enemies’. That is not the criterion I intend to employ today.

Summary

Instead today I am going to:

First, acknowledge the existence of market failures and market imperfections in the delivery of public services in particular, and therefore the need for government intervention in the provision of `merit goods’ on grounds of equity and efficiency.

Second, however, acknowledge also the existence of government failure.

Third, set out why I believe Gordon Brown exaggerates both the powerlessness of the consumer and the omniscience and benevolence of the State, and therefore exaggerates the need for a centralised State monopoly in health care.

Fourth, show why the inevitable outcome of Gordon Brown’s approach is a substandard service. 

Finally, put forward ways in which a compromise can be reached between a wholly market-led system and a wholly State owned and funded system, with users of public services, and professionals who work in them, being given a greater say in the provision of those services, leading to rising capacity and higher standards.

Public versus Private

Of course no one in British politics would take the extreme position that all transactions should be governed by the market mechanism or that all should be governed by the State. No one believes in an entirely private economy, and no one believes the economy should all be in the public sector. 

The challenge is to find the right balance between the two.

Market Advantages

A useful starting point is to consider the advantages and disadvantages of a market approach to the provision of goods and services

The private sector accomplishes many tasks very well. 

As a market mechanism functions on the free exercise of choice, it leaves more decisions in the hands of people themselves rather than the State. And, partly as a result, in general the market tends towards the efficient allocation of resources. People are more likely to satisfy their needs and wishes if they can make the decisions themselves. 

A relatively free market economy tends towards higher total incomes – and, indeed, higher amounts to be spent on public services such as health and education. 

And markets reflect the preferences of millions of people. They represent economic democracy at work. 

Market Imperfections

Markets are not, however, perfect. As Gordon Brown said in his address, governments should `recognise that there are limits to markets’.
 
There are some cases where the free market will not produce the most efficient outcome. Regulation or other intervention will be required.

Standard analysis includes in this list, for example, the existence of externalities such as pollution. 

`Public goods’ are also included. In the strict sense of the term as used by economists, these are goods – such as defence, or street lighting – where consumption by one person does not preclude consumption by another. In a market system, therefore, it becomes difficult to avoid free riders obtaining these goods without paying for them.

Clearly there are also other examples of imperfections in markets. 

These include barriers to entry and large economies of scale. At their most extreme, these tend towards monopoly. All political parties therefore agree on the need for some form of regulation in this area.

There will also be imperfect information in any market, or information which is asymmetrical between producers and consumers. In markets associated with risk, where insurance markets would normally develop, such imperfect information flows may help to produce problems of adverse selection or moral hazard. 

However we need to be aware that such departures from the notional model of so-called `perfect competition’ do not, in themselves, invalidate the market process.

Far from it. As the Austrian school and others have pointed out, the market and the process of competition may themselves be the best way to rectify shortages of information, for example. Markets, at their heart, are discovery procedures. They are, above all, characterised by dynamism – involving a continuous search for new commodities and better techniques, and providing a continuous response to changing conditions. The competitive process, involving often millions of individuals expressing their needs and wishes, can often be far more effective in providing that information than government can, involving as it does politicians and bureaucrats second-guessing the views of those individuals. 

Government Failure

Because government often fails too.

For example well-intentioned regulation may have unintentional and unforeseen consequences, through the creation of perverse incentives. 

And `public choice’ economists have looked at the `economics of politics’, examining the way in which politicians and civil servants may have their own set of objectives. They may for example be captured by special interests. To use economic jargon, they may seek to maximise their own utility, however that is determined. This does not necessarily mean they behave in a particularly selfish way. But the outcome of their decisions may differ from the optimum outcome for society as a whole. The TV programme `Yes Minister’ - which has aptly been described as not so much a satire as a training programme for civil servants - illustrated the theories of the public choice school in a slightly more accessible way.

Gordon Brown told the SMF that we must avoid the trap of simply replacing market failure with State failure. He was right. But the example he used, of an effective non-market means of delivering core objectives, was his system of public service agreements. Yet the current PSA regime is one of the best examples I can identify of government failure: of government action which distorts behaviour in an adverse way, deflecting attention away from an optimum outcome, in this case the delivery of front-line services, in order to meet artificial targets set by administrators and politicians - in some cases even to the extent that cheating is encouraged, to give the impression that targets are met.

So we need to recognise that government failure does not just arise when the State owns the means of production, distribution, and exchange. It can arise through excessive micromanagement, interference, and over-regulation, activities with which Gordon Brown is not wholly unfamiliar. 

This analysis does not preclude regulation. But it does lead to a healthy scepticism about the omniscience - and benevolence - of government.

Equity Considerations

Quite apart from issues of efficiency, there are also clearly cases where the outcome of the free market process is regarded as inequitable, partly because of the market imperfections I have identified, leading policymakers rightly to conclude that government intervention is required. 

For example considerations of equity will lead policymakers to provide for a system of taxation and welfare, to provide for insurance against times of hardship, or to provide a safety net for the less well off.

At other times government will intervene to regulate – not merely to enforce private transactions, as in the case of contract law, but to restrict them. For example health and safety laws prevent employees working in risky conditions even if they would wish to take that greater risk in return for higher pay.

And, of direct relevance to the public services, government will wish to intervene when a good is considered to be a `merit’ good, which society thinks everyone ought to have. In these cases the outcome of a wholly market solution will not be considered to be equitable. I will explore this issue a little later.

Conclusion: Public and Private

So, before I seek to apply these general lessons to the public services, what can we conclude about the roles of the market and the State? 

I believe that there will always be a need for significant State intervention in the economy, sometimes through regulation, sometimes with the State as the purchaser of goods and services, at other times as provider too. 

But I also believe that the advantages of the market process should not be underestimated. These advantages relate both to the freedom it provides for people to express and satisfy their own requirements, and to the outcome this often produces in terms of increased efficiency, through the competitive dynamic and the provision of information about people’s needs and wishes. In general, in a liberal economy, the presumption should be that the market mechanism is to be preferred unless there are overriding factors to the contrary.

In some areas of policy Gordon Brown recognises this in his speech. But in other areas, by over-emphasising the existence of market failure and under-estimating both the advantages of the market and the possibility of government failure, he concludes that we must replace the market mechanism almost entirely.

I agree that with some goods and services the degree of government intervention may need to be substantial. But even in these cases, that intervention should have the aim of addressing specific issues which have been identified, either because of efficiency or equity considerations. If at all possible, government should not seek to override the preferences of individual producers and consumers completely. That may often lead to supposed market failure being replaced by severe government failure, to the general disadvantage of all.

Public Services: Background

So how does this analysis relate to the public services?

There is a range of legitimate reasons why government would wish to intervene in the provision of public services such as education and health.

Such services are merit goods. Merit goods have two characteristics. First, society rightly thinks that everyone ought to have access to them, regardless of income. That aim could be solved simply by means of a transfer of income. But merit goods have another, even more important, characteristic. They are goods which society thinks people ought to have - regardless of whether everyone would actually choose to make provision for them, even if they had the required levels of income. 

Why do people’s own preferences have to be overridden in this way? It is partly for some of the reasons I have outlined: externalities (for example society as a whole benefiting from an educated population), and imbalances in information (for example people not being fully aware of cost of healthcare should they fall ill). But also, linked to the externality argument, society knows it will have to pick up the bill if provision has not been made but later becomes essential (for example if someone neglects to take out health insurance but who then requires emergency care). 

In all these cases there are various ways in which government can intervene. So the big question is not whether there should be government intervention in both the demand and supply of merit goods. The big question is what form that intervention should take, how great it should be, and how and by whom the necessary decisions should be made. 

Private Sector involvement in the Public Services

Criteria

It follows that the degree to which markets will be allowed to operate in the public services – and, linked to that, the degree to which the private sector (ie individual consumers and producers) become involved – will depend on the extent to which government believes that, for efficiency or equity reasons, consumers and producers cannot be allowed to make choices for themselves. Even where a good is considered to be a merit good, if such choice is allowed within certain constraints there will be some room for private sector involvement.

The nature and extent of government involvement should depend in large measure on the nature and extent of market failures or imperfections identified.

If one believes as Gordon Brown does, in the case of health care, that there is severe market failure which `cannot be corrected through market-based government intervention to make the price mechanism work’, and that such failure is on the supply as well as the demand side, then it follows that governments should tend both to purchase and supply the service. 

But if the problems relate mainly to the demand, and therefore the purchasing, of the good in question rather than the supply, then government should be involved in the purchasing of the service while leaving open the possibility that the private sector might provide it.

The example of local authority social services departments demonstrates that, even where the public sector is a purchaser of care, it can act as an enabler utilising a mixed economy of provision from private companies, the independent sector and voluntary organisations. In many authorities over half the social services budget is spent on outside providers of care in this way. Indeed, this is now being taken a stage further through provision for 'direct purchase' where users can decide for themselves the service provider they choose to use. 

Of course very few services will fit neatly into these categories, and every case should be considered on its merits. Sometimes a mixture of public and private financing and production may be the best way to provide a service.

Learning from Elsewhere

These issues are not, of course, unique to the United Kingdom. But the UK response has been markedly different from the response in other countries. We have traditionally opted for a structure in health care which involves far more State control, with government rather than private individuals taking most of the key decisions about production and consumption. 

It is far from apparent that our model has been more successful. And it may not be particularly logical. As Anatole Kaletsky has written in the Times, many of the perceived and real market failures identified by Gordon Brown apply equally well to other services. Some of these are in private hands. In others, a compromise has been reached. 

The Case for Greater Private Sector involvement in the Public Services: the Role of Consumers and Professionals

I believe that the time has come to look again at the role of public and private sectors in the demand for, and supply of, our public services. I believe that too much decision-making has been taken away from the consumer and transferred to the State. And I believe that is a major reason for the fact that the British people too often receive substandard services.
 
This issue – the role of the consumer - is central, and goes to the heart of my differences with Gordon Brown on reform of the public services. 

The powerlessness of the consumer is a theme running through the public services section of Gordon Brown’s speech, especially in relation to health care – where he says `the consumer is not sovereign’.

Of course it is the case that there is an asymmetry of information in many public services, and that the practitioners, on the whole, will possess greater knowledge than the patient or parent. Indeed, in health care, at the diagnostic stage at least, it is information which is being sought. In education too, information forms a large part of the service being provided. 

But that is also true in other professions and, increasingly in a technological age, in the provision of many other goods and services. Indeed, it is in the very nature of a profession that this is the case. 

That does not mean that the consumer cannot exercise any choice between professionals or providers. In health care they may be able to make an informed choice between treatments, too. If I seek advice on a mortgage, or on the condition of a house I intend to buy, I do not necessarily stake a claim to be an expert in financial services or on detecting the existence of dry rot. I turn to professionals who possess greater knowledge in these areas than I do. But this does not mean either that I cannot be trusted to have any involvement in choosing which professional to ask, or that, having made such a choice and obtained the information, I should have no role at all in making the final decision on which house or mortgage I should buy.

Similarly, we should not ignore the ability of people to make choices about their health care, or about the school their child will attend, when presented with information and professional advice by, in the case of health, their GP. In fact, as well as being patronising, Gordon Brown’s analysis looks increasingly dated – especially in light of the increasing use of consumer empowerment elsewhere, of the use of the internet, and of public information campaigns. In the modern world people want to be involved in the decisions which affect their lives. 

It also ignores the role of the market – suitably adapted – in providing information in the first place. In fact faced with greater consumer power, providers often ensure that information about their product – whether exam results or quality of hospital care – is provided in an accessible manner. This is precisely what happened when parents were given a greater say over the schools their children attended. Gordon Brown’s analysis also over-emphasises the ability of the State to acquire enough information about the needs and wishes of millions of people in order for it to be able to direct resources from Whitehall in a way which will meet those needs. 

Yet if one believes that consumers cannot be empowered, it will inevitably follow that one does not think that consumers, and market forces, will have any significant role to play in providing information, stimulating competition or driving up standards. That is the Brown analysis. 

Furthermore, not only are people left powerless to make choices on the allocation of resources in health care, for example, but they are unable to choose how much is spent on health care either. They may of course choose not to use the NHS. But the system is stacked against such decisions, because that means paying twice over. The fact that more and more are taking out private insurance and, even more stark, that 250,000 each year are paying for their treatment privately even without insurance, is testimony to the failings of the NHS rather than the attractiveness, under the current system, of private health care. 

Removing from people the decision of how much to spend also leads, inevitably, to their having less say in how the money is spent. As a result, the allocation of resources over the last fifty or more years has become more politicised. Decisions on how much money is spent, and how it is spent, do not necessarily reflect either economic or clinical judgement but rather political pressures. Public choice theory – and common sense, as well as a cursory viewing of Yes Minister – suggests this will not always provide the best outcome.

It may of course be the case that, if people were allowed to choose how much to spend on health care, they would choose to spend more than the State has traditionally chosen to spend. If people are not allowed to supplement State funding from their own resources, there is unlikely to be an optimum amount of health care provided. Giving people more say in the issue is by no means a ‘cheap’ option. As free market health economist David Green has said, continuing to finance health care almost exclusively from taxation makes sense only if limiting total national spending is a more important priority than responsiveness, the introduction of new technology, the enhancement of cost-effectiveness and the promotion of higher quality care.
 
Furthermore, a centralised system in which decisions are made by the State will also downplay the role of the professional. In such a system, it is often not the professional making the choices, but the bureaucrat – and often at central rather than local level. It is little surprise that in education, teachers feel more and more exasperated that their role as professionals is being marginalised. Similarly in health it is the bureaucrat who decides which treatment should be funded and made available and which should not. In both cases, it is the bureaucrat – or politician – who decides which are the priority areas, and sets targets from Whitehall to ensure that local professionals abide by that judgement. The current structure of public services provision is directly responsible for the current disillusionment of professionals in our public services. They feel deprived of initiative, endlessly scrutinised and second-guessed. Under such circumstances it will become increasingly difficult to attract and retain the calibre of people required in order for high quality services to be provided. The `ethic of public service’ which Gordon Brown rightly identified as being at the heart of health care provision, is at risk not from reform, as he claimed it would be, but from the current structure and the failure to reform it. 

No-one should be surprised that the result of all this is likely to be substandard services. The consumer has little ability to choose a service matching his or her needs, and so there is less of a dynamic forcing standards to rise. The role of the market in providing information is also ignored, meaning resources cannot be allocated in a way that adjusts to the unpredictability of demand in different local circumstances. 

So how might greater private sector involvement, and market discipline, be introduced into the public services? 

Health

I start with health.

Merit Good

Health care is undoubtedly a merit good. Health care should be available regardless of ability to pay. No-one should be denied necessary medical treatment simply because he or she is unable to afford it. 

It follows that equity is a paramount consideration. Without government intervention, the availability of health care would be determined by ability to pay. It should not be.
 
As Gordon Brown said, we must consider the nature of the product we are talking about. Health care decisions, if determined wrongly by flawed processes, have a `potentially catastrophic and irreversible outcome’. On that we are agreed. 

Given this background, there are various reasons why leaving health care entirely to the market would produce an outcome which is both inefficient and inequitable.

But unfortunately it is equally clear that the outcome from our current arrangements is also both inefficient and inequitable. That is why reform is required. 

The Case for Government Intervention in Health 

Why should governments intervene in health care?

In his speech, Gordon Brown was right to say that there will always be a need for regulation, to ensure that proper professional standards are maintained and to protect individuals who, through a lack of appropriate information, through illness or through the infirmities of old age, are not able protect themselves. 

But, as he noted, regulation alone will not be sufficient. 

Why is this? 

There are two main reasons.

First, in some cases – as with the existence of externalities – I agree with Gordon Brown’s analysis of market failure.

And second, government will clearly wish to intervene for reasons of equity. For example the need for health care is both acutely uncertain and also extremely uneven between consumers. Someone with a history of chronic illness, for example, would in a purely free market system find it difficult to purchase insurance at all, let alone at a reasonable rate. 

So intervention is required for reasons of both efficiency and equity. The State must ensure that the desired amount of health care is provided. Even having ensured this, a free market system will not be sufficient to provide an equitable outcome.

But Gordon Brown also outlined several other examples of market imperfection in health care. It is with some of his conclusions in this area that I would take issue. 

On the one hand, he identified in the case of local emergency hospitals `the necessity of local clusters of medical and surgical specialisms’ with `characteristics that make them akin to natural local monopolies’. To back this up, he said that 50 per cent of admissions were emergency, urgent or non-elective cases where patients are `generally unable to shop around’. But this does of course leave the remaining 50 per cent. 

On the other hand, he said there was `chronically imperfect and asymmetric information’. Consumers, he said, may be unknowingly ill, poorly informed of available treatments, reliant on others to understand the diagnosis, and uncertain about the effectiveness of different interventions. 

But his view that such information gaps cannot be bridged suffers from the flaws I outlined earlier – namely that asymmetric information does not in itself prevent the patient making choices over his or her care, and that this capacity to make choices gives providers the incentives they need to make greater amounts of information available.

The Case for More Consumer Choice and Reform of Health Care

Gordon Brown concludes that market failures in services such as health care are `chronic’. If this is so, the ability to use the market mechanism is clearly severely limited. The case is made, he says, for both the public funding of health care and the public provision of health care on efficiency as well as equity grounds. 

But although it is true, as I have said, that there will indeed always be a need for significant government intervention in health and social care – both in terms of spending and regulation - I do think that there should be a much more mixed economy of care than there is at the moment. For the reasons I have already set out, and in particular Gordon Brown’s exaggeration of both the powerlessness of the consumer and the omniscience and benevolence of the State, he exaggerates the need for a centralised State monopoly in health care.

He is right to say that decisions about health care are often more important than buying a house or a mortgage. They may indeed have far-reaching or indeed irreversible consequences. But why should that, in itself, eliminate the role of the patient on these issues? Of course there will be exceptions, as for example in cases of emergency, when the patient will be willing to leave all decisions to others. But generally, when there are major choices and far-reaching consequences, who is in a better position ultimately to make those choices than the person affected?

Gordon Brown did in his address pay lip service to some `contestability between providers’, and to some role for the private sector in the NHS. He points to current Government reform. But such reform is extremely limited. So why do the Left continue to express concern about such a competitive process, with a greater role for consumers and professionals driving up standards? It may be based on a fear that those standards would be in driven up at an unequal rate. Gordon Brown points to more market-based systems elsewhere being characterised by `allegations of two tier care’ which are `divisive’. He told the SMF that `we should seek the maximum amount of diversity consistent with equity’. But, despite his claims to the contrary, he is making the mistake of equating equity with equality. As Iain Duncan Smith has said, if we refuse to allow one foot to go forward before the other, we are unlikely to get very far. So Gordon Brown should be quite open about the implication of his analysis: the price of uniformity is a lower quality of public services. I for one do not think that `equality of misery for all’ is an appealing rally cry.

This has direct relevance to his views on consumer choice. As Dan Corry has written in the Guardian, Gordon Brown’s fears of adopting market-like mechanisms of `user-choice’ too heavily, especially in health, `are partly of the inequalities that might arise…’ (6 March 2003). 

Of course Gordon Brown does not claim to be rejecting consumer choice entirely. Indeed, in his scene-setting speech on health to the SMF last year, he tagged a section on to the end of his speech on this very subject. Or, as he put it himself, 6086 words into the speech: `Finally, choice’. 

That exactly reflects the role of consumer choice in actual Government policy in this area. As Liam Fox has said, in today’s NHS, patients have no meaningful choice over the treatment they receive. Individual choice is effectively excluded at every stage: patients have practically no choice of GP and are simply attached to a list; if they fall ill and have to be referred to a consultant, they cannot choose who it will be, which hospital they attend or when they will be treated; and if they do not conform to the bureaucratic rules, their operation may be cancelled and ‘like naughty children they’re sent to the back of the queue’.

But if Gordon Brown and the Government do not believe that the consumer can or should be trusted, how could it be otherwise? 

Overseas Comparisons

As I have pointed out in relation to public services more generally, most advanced economies have faced the same issues in relation to health care provision, but have adopted a range of different solutions. Gordon Brown constantly seeks to imply, as he did in his speech, that the US system is the only alternative to the current NHS structure. The US was the one example he used of an alternative system, ignoring the whole plethora of models elsewhere. This is absurd. As Derek Wanless, Gordon Brown’s hand-picked lieutenant, showed, it is, indeed, the case that even in the United States, the public sector spends roughly the same ratio of GDP on health care as the British Government does on our National Health Service. So to depict the United States as the home of free market economics in health care is very wide of the mark. Its problems are to do with the structure it has adopted. 

Government Failure and Substandard Service

The current structure in Britain is not working. I said earlier that people want to be empowered. But the thing they want most of all is a high quality service. The result of the current system is not only lack of consumer choice and professional empowerment, but a less than optimum service for patients. Instead, there is burgeoning bureaucracy, where for the first time in the history of the NHS the number of administrators is actually greater than the number of beds. We are left with British patients suffering from lower survival rates for many major illnesses than our neighbours in Europe. And we are left with a recent rise of 22 per cent in health funding producing a rise of less than 2 per cent in the number of patients treated in hospital. In the NHS, the combination of lack of real reform and the limited availability of non-NHS supply means that total health care capacity is hardly rising at all. As Dr Maurice Slevin said in his recent CPS pamphlet, patients need to be given the power of the consumer if the resources being made available for the NHS are going to deliver the necessary improvements. 

To quote Liam Fox again: `There is no mystery about the NHS’s failings. Because it is wholly financed from the Exchequer, it is subject to an inflexible Treasury control which has resulted in under-provision. Because it is centrally planned, its services are administratively rationed. Because everyone is meant to be able to receive the same healthcare wherever they live, debate is more often focused on equalising standards than on raising them. Because the NHS is monolithic, it is inflexible and discourages innovation. Because healthcare is politicised, the needs of individual patients are subordinated to the image of a government. Because the State is effectively a monopoly provider, healthcare in Britain is riddled with inefficiency’.

Few would doubt that the current NHS exhibits several characteristics of `government failure’. 

Equity Considerations

I started my speech by quoting Gordon Brown’s objective of a `fair Britain’. It is an objective I wholeheartedly endorse. Fairness – or equity - is at the heart of our agenda. `A fair deal for everyone’ means fairness to those in society who most need help and fairness to the majority who pay for the public services. 

Considerations of equity are especially important in the case of health care, a merit good. It is precisely those considerations of equity which lead me to think that the current structure is not working. And it is considerations of equity which should determine the best way forward.

Three broad categories of health care are usually recognised as only being possible if the State funds them: health care for low-income households, care associated with long-term chronic illnesses such as mental illness, and the diseases associated with old age. All three would be provided for inadequately by insurance in a purely private system. But paradoxically in the National Health Service too, these are the very areas that have been neglected throughout its history. Mental illness, elderly people and low-income households have been the Cinderellas of the NHS. They have been starved of resources. Powerful interests groups within the health service have placed other priorities ahead of them. The very areas of health care which present the most powerful case for government intervention have been neglected under the British NHS.

At present, many of the poorest people in Britain, who may have the greatest need for health care, often receive the worst deal. We must ensure that the ethos of the NHS is honoured more than it is now. 

This means for example that we do not intend to extend the scope of compulsory charging for use of the NHS. To raise significant revenues from doing so would undermine an NHS available to all, regardless of the ability to pay. The exception might be charges for abuses of the NHS, such as missed appointments, an issue on which we have been consulting. 

Our ultimate goal is better, fairer and more accessible outcomes in health care delivery. We will not be reforming services for the sake of it, but because we passionately want them to improve. 

The Way Forward: Reform 

Based on those firm principles, I believe that the best way forward should be a compromise between a wholly market-led system and a wholly State owned and funded system. The trick is to get the right balance between the two. The fact is that charging, with consumers as direct purchasers, is not the only way to harness consumer choice. And conversely Government intervention and funding of healthcare does not mean that it has to be a monopoly funder or provider of medical services. 

We should not underestimate the difficulties of reforming and modernising the NHS. But this is a vital and pressing task if we want a health service which is truly world class. 

As Liam Fox has said, a modern NHS must cater for well-informed individual choice that is satisfied by well-run individual providers. He has outlined reform on three broad fronts: taking politicians out of running the NHS; giving real freedom to health professionals; and ensuring that patients have real choice. That choice should be available for all patients, whether they receive their health care from the NHS or another provider. 

Under our Patients Passport proposal, patients would be allowed the option of moving between any NHS provider and would be allowed to take some or all NHS funding with them if they decide to have treatment in the not-for-profit, voluntary or independent sectors. Providers will be funded on the basis of activity.

We want to develop new capacity by encouraging more spending on health on top of that already spent in the NHS. The aim is to see total spending on health care increase, with spending from sources other than the State increasing at a faster rate. It is largely in private funding – not in funding from the State – that the gap in total health spending between ourselves and other countries arises. 

We intend to recognise the benefit that people make to the NHS by contributing from their savings or their earnings to their healthcare or that of their families. 
There are three main candidates which might be incentivised: personal private medical insurance (PMI), PMI available through company schemes, and the pay-as-you- go market where patients pay for a single procedure or item of care.

We have also set out proposals for Foundation Hospitals to have freedoms similar to those enjoyed by their equivalents in Spain – in particular the freedom to set their own pay and conditions for staff, the freedom to borrow, and the freedom to invest. 

At the primary care level, the role of the GP will be enhanced. GPs would act as independent professional advocates for patients, advising them on factors such as waiting times, outcomes and the location of the treatment. 

An NHS revolving around patient choice would be a less bureaucratic and impersonal NHS. Empowering patients to become involved far more directly than they are at present, with less need for bureaucrats and politicians to direct and second-guess, would provide for a more responsive Service. It would recognise the potential role of patients in directing resource allocation and effecting higher standards. That role is completely lost in today’s NHS and just as completely lost in Gordon Brown’s analysis. 

Market forces, properly harnessed and regulated, tend towards pluralism and diversity. People’s different needs and wishes are reflected in a wide variety of provision. 

They also tend towards innovation. People running hospitals, managing wards and making clinical judgements have to be able to innovate and exercise their own professional judgement. Of course it won’t happen at the same pace everywhere. But does that really mean that government should prevent it anywhere? 

In a modern health service, the pressures for efficiency, the requirements for accountability and the scrutiny of quality will turn out to be greater not less than in the present centralised system. Under the current system it is those who live in hard-pressed inner city hospitals, or who cannot afford to go private, who often end up losing out. These are among precisely the groups who will gain from an overall rise in standards in a reformed NHS. Then we will begin to get close once again to the proud and noble aspirations of the NHS, in which quality health care is available to all, regardless of ability to pay.

Other Services

I have spent a considerable amount of time looking at the principles of reform in the NHS. It is necessary to do so, because it is in health care that these issues are at their most stark.

But it is necessary for government to trust and empower the consumer to a great extent in other public services as well, as we drive for improvements in quality. It is a general principle that we want to make providers of public services accountable to people as consumers rather than politicians, and to break down the barriers that divide different types of provider, so that it becomes irrelevant whether the provider of a service is publicly-owned, voluntary or private, so long as the service it provides is excellent. State-funded services need not be State-run services.

Education

In education, our goal is to create a system in which no child is left behind. We will achieve this by trusting heads, teachers and schools with greater autonomy and trusting parents to choose the school that is best for their child. We believe that the key factors behind the success of those schools which do manage to transform themselves – namely autonomy, innovative leadership, and discipline – are undermined by a structure characterised by centralisation and micromanagement. Without trust, schools are often unable to deliver.

We have proposed, for example, the introduction of State Scholarships to break the monopoly link between State funding of education and State provision of schools, a link that is absent in many other European countries. Starting with the inner cities, we will allow parents and other groups to establish new schools for which pupils attending would receive State Scholarships. 

The aim will be to provide a level of choice and quality and diversity of education that is presently only available to a few. State scholarships will allow and encourage new schools to be set up and to receive State finance by attracting pupils to whom funding is attached. Some will be voluntary, some private. Charities, community groups and private companies would be able to set up a school and receive funding through the pupils it attracts. All schools would of course be subject to Ofsted standards. But they would have greater independence over budgets and policies, and would be relieved from the current flood of paperwork under which they are submerged. Heads and schools would also have the final say over the exclusion of disruptive pupils.

Conclusion

What I have sought to demonstrate is a pragmatic approach to the role of the private sector in public services. 

In relation to health care, Professor Alain Enthoven has commented that: `an economist is someone who tries to prove that what works in practice also works in theory, except in health care. Some health economists seek to prove that what works in practice cannot work in theory’. 

In his lecture in this auditorium, Gordon Brown was trying to prove that a structure which is patently not working as well as it might should largely be left alone, because it works perfectly well in theory. And, similarly, that we cannot learn from other structures overseas because, overlooking their attributes in practice, his theory does not support them.

Not surprisingly given this background, his theory was amiss too. I have acknowledged the need for government intervention in health care and other public services. But Gordon Brown was wrong to exaggerate the extent both of the powerlessness of the consumer in public services and the extent of the market failures which are linked, in large part at least, to that alleged powerlessness. He also woefully underestimated the extent of government failure. He went down this course in an attempt to provide a cloak of respectability for his preconceived objections to markets in the public services. And it was only by overplaying his arguments in this way that he was able to present a theoretical justification for the current structure of health care with its large degree of State control.

But at the end of the day, the million patients on the waiting lists are unlikely to be impressed with a lecture, even one of Olympian proportions, which attempts to prove the opposite of what their own experience patently tells them. The fact is that healthcare in Britain falls woefully short of what we should expect in the world’s fourth or fifth largest economy. We must have the humility to learn from the success of others or British patients will continue to suffer unnecessarily.

And to do so we must learn to empower the consumer, not just in health care but in other public services too. Instead of sweeping the market aside, where there are imperfections for reasons of efficiency or equity the aim should be to modify the outcomes of the market process in order to address those particular consequences.

So let me end by looking ahead, and comparing and contrasting two visions for the role of the consumer in health care provision.

The first is from Gordon Brown’s speech. He told the SMF here at the Cass Business School that `the consumer is not sovereign’.

The second is as follows: `Patients are at the heart of the health service of the future. With access to better information, they are involved fully in decisions – not just about treatment, but also about the prevention and management of illness. The principle of patient and user involvement has become ever more important and the health service has moved beyond an ‘informed consent’ to an ‘informed choice’ approach’.

That is the view of Derek Wanless, commissioned by Gordon Brown to look at how the health service should look in 2022. He was given by Gordon Brown a terms of reference rigged to ensure that the structure he would recommend was pre-determined. Yet even Derek Wanless arrived at a fundamentally different view of the role of the consumer. 

Gordon Brown’s view of the impotent patient lies at the heart of his view of the structure of the NHS. The question is whether that current structure – indeed, the structure pre-determined in those rigged terms of reference – will ever produce the patient-empowered and patient-driven NHS that Wanless says he wants to see.

There is clearly a need for an open mind on health care and other public services reform. Gordon Brown himself claimed that most on the left and right are agreed that the question of the involvement of markets in the public sector is a question about means, not ends. But the implication of this is that greater market involvement should not be ruled out if markets can have a role to play in producing the best possible outcomes for the public interest. That should be our criterion. What should matter is indeed what works. 

The questions that I have addressed this evening will, I believe, occupy the centre stage of political debate over the next few years.

The present Government is testing our existing models of public service delivery to destruction. For years we were told there was nothing wrong with these models. All they needed to deliver world class services was just a little more money. Now we are told, by the Government itself, they need a lot more money. And they are getting it. But we are still not getting the improvements we all want to see. 

I think this is going to change the terms of trade in this debate. For the first time in generations, the people of our country are going to be receptive to new ideas of public service delivery, to ideas which borrow from the experience of others and show that there is a different and better way of doing things. 

This is an historic opportunity for our country. It is also an historic opportunity for the Conservative Party. I believe that we are the only Party that can put forward alternative policies for our public services that are unblinkered by ideology, free of dogma and independent of the purse strings of powerful vested interests. 

It is an opportunity that, for the sake of our country, we must not squander. 

Rt Hon
Michael Howard QC MP