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An arbitrary profit cap won't help the NHS

    There is a certain irony that Ed Miliband chose the site of the 2012 London Olympics today to condemn the growth of markets and competition in the provision of healthcare in the UK. The Olympics Games, of course, is well known for its lack of competition.

    Miliband proposed introducing a cap of 5% on the profits earned by firms with contracts with the NHS of a value of £500,000 or more. As I mentioned to CityAM, this is a nonsensical proposal to solve a non-existent problem. Firstly, Miliband’s argument that the Government has overseen a wholesale privatisation of the NHS is objectively untrue. Secondly, Labour’s open hostility to non-state providers of healthcare is damaging to patients.

    As the graph from the Mail shows, the proportion of the NHS budget which is used to commission healthcare services from private sector providers has only increased from 5% to 6% under the Coalition. It is difficult to see how just a 1 percentage point increase can be classed as selling off the NHS. The fact that this proportion rose faster under Labour is also rather awkward for the party. More broadly, it is worth pointing out that whatever the rights and wrongs of doing so, the Government has increased health spending in real terms, something which Labour categorically opposed.

    Other than being factually untrue, Miliband’s attack on what he terms “privatisation” reveals a deeper, antiquated world view. He is not arguing that the quality of services provided by private healthcare providers is inferior; indeed the BBC polling seems to suggest the reverse. No, his real argument is that the provision of healthcare by private providers is intrinsically wrong – despite still being free at the point of use. For Miliband, the provision of services by the state is inherently more virtuous than the greedy private sector.  

    What is right is what works. The truth is that the delivery of some healthcare services by the private sector can improve outcomes for patients. Miliband’s blinkered opposition to the private provision of services would ultimately manifest itself in a reduction in health innovation and worse patient outcomes. Waiting times, infection rates etc are all susceptible to deterioration.

    The cap on profits that he is proposing is also arbitrary. Why exactly does a profit margin of 4.9% represent good value for the taxpayer but not 5.1%? What compelling reason is there for contracts of a value of £500,001 to be subject to the cap but not contracts worth £499,999? What difference would it make if non-medical services such as cleaning or catering earned 5.1% profit margins? Good value for money cannot be judged solely according to a pre-determined profit margin. Moreover, why on earth shouldn't firms which have invested and delivered quality services be rewarded with profits?

    There is a danger that under the system envisaged by Miliband, some firms will be deterred from bidding for contracts at all. Companies need to make a return if they are to spend such a lot on delivering services and to be able to pump back into new investment and innovation. Capping margins reduces the incentive to invest in the first place. This seems like a particularly bad idea given the existing strains on capacity.

    To be anti-profit is to be anti-investment. An arbitrary cap on profits from contracts of an arbitrary value is no way to encourage reform. It will do the NHS and the healthcare of the British people no good.

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

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