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A hard-nosed look at health spending is the soft-hearted thing to do

    Recent headlines about the NHS drugs policy possibly being refocused towards people who generate a “wider societal benefit” highlight the need to find better ways to manage taxpayer funded health expenditure.

    Some of the problems with this particular suggestion are explained by Melissa Kite. There’s something rather disconcerting about bureaucrats ranking us all individually and judging how worthy we are of treatment based on our capacity to produce goods and services. Furthermore, how much we earn currently is not the best way of measuring our productive potential. This is not to mention the fact that people who have worked hard and paid substantially higher taxes to fund the NHS should have a reasonable expectation to receive the healthcare for which they paid.

    However, the sad reality is that we do need to find ways to deal with ever higher healthcare cost pressures. Massive real terms increases in health spending under Labour led to state health expenditure rising from 5.2% of GDP in their first year in office to 8.2% of GDP in their last year. In 2012/13 prices, health spending in 1997/98 was £62 billion and this had more than doubled to £124.6 billion in 2009/10. This increase was much faster than in France or Germany. Even taking into account population growth, do we really think that Labour’s spending led to an equivalent increase in the quality of our healthcare?

    The difficulty is that even a real terms freeze in health spending is extremely problematic given the demographic reality of a rising and ageing population. The UK population is expected to increase to 73.3 million by 2037. The number of people aged 65 and over is expected to rise from 10.8 million to 17.8 million and the over 80s will more than double to 6 million. Another reason for upward pressure on health spending is the Baumol Effect which describes rising wages and rising total health spending which are not backed by any underlying productivity gains. It is notoriously difficult to measure healthcare productivity but the ONS estimates an average annual productivity growth of just 0.5% between 1997 and 2010. Moreover, as we get richer as a country our healthcare preferences become more demanding; this is of course a good thing but adds to the upward pressure on costs.

    It is natural for healthcare requirements to rise with age and it is good that we are becoming more discerning patients but in the long term, spending is constrained (or at least should be) by tax revenue. Unless we find ways to use our existing resources more efficiently and reduce the upward pressure on costs, then taxes will have to rise even further. We can only raise taxes so far before crushing work incentives, shrinking our economy and making us all worse off.  

    Whilst cutting funding for those who have had “a good innings” is clearly undesirable, we must still take a hard-nosed look at all the drivers of spending growth to protect our economy and safeguard essential health services for future generations. As well as continuing to look for efficiencies, consolidating and streamlining services and cutting bureaucracy, an important way to cut costs is promoting productivity growth within the NHS. In the short term this can be done by embracing medical innovation through the Saatchi Bill and reforming the EU Precautionary Principle for example. In the long term, our healthcare system should develop the flexibility to take on exciting technological developments which allow much more personalised medicine and self-diagnosis. 

    Adam joined the Centre for Policy Studies as Head of Economic Research in January 2014. 

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    Dave Lewis - About 2509 days ago

    Whilst I think you are correct to call for a wide ranging review of health spending to ensure that we get value for money I am suspicious about the continued use of the aging population as an excuse to explain any shortcomings in the health service. A cursory glance shows that a considerable amount of NHS resources are used on maternity services and health care for children. Also whenever I have to attend A&E with a relative who often needs urgent medical care the waiting room is full of three groups 1. Young people who have drunk and drugged themselves stupid 2. Anxious parents with babies who are clearly not that ill and 3. Patients with obvious metal health issues who have obviously been failed by "care" in the community. I know where I would look for efficiences and savings and it's not from pensioners.

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