Factor substitution in the National Health Service

Case study 5.3: Factor substitution in the National Health Service

The National Health Service (NHS) in the UK was founded in 1948 and was the first state-run free health service in the world. It originated at a time of national euphoria following victory in World War II, which generated a sense of confidence and solidarity among politicians and public. In particular it was felt that class distinctions were finally disappearing. The extensive rationing of products, both during and after the war, played a big part. Not only did this result in queuing for goods by rich and poor alike, but it gave the government a sense that state control of distribution was not only possible but in many cases desirable. The basic objective was to provide all people with free medical, dental and nursing care.

Don't use plagiarized sources. Get Your Custom Essay on
Factor substitution in the National Health Service
Just from $13/Page
Order Essay

It was a highly ambitious scheme that rested on various premises that have since proved flawed. These were:

1 The demand for health care was finite; it was assumed that some given amount of expenditure would satisfy all of the nation’s health wants.

2 Health care provision could be made independent of market forces; in particular doctors were not supposed to consider costs in deciding how to treat individual patients.

3 Access to health care could be made equal to all; this means that there would be no preferential treatment according to type of customer, in particular according to their location.

The flaws became more obvious as time went by, and were aggravated by the fact that the system was based on the old pre-war infrastructure in terms of facilities. This meant that the provision was highly fragmented, with a large number of small hospitals and other medical centres. The first flaw became apparent very quickly: in its first nine months of operation the NHS overshot its budget by nearly 40 per cent as patients flocked to see their doctors for treatment. Initially it was believed that this high demand was just a backlog that would soon be cleared, but events proved otherwise. Webster,8 the official historian of the NHS, argues that the government must have had little idea of the ‘momentous scale of the financial commitments’ which they had made. Since its foundation, spending on the NHS has increased more than fivefold, yet it has still not kept pace with the increase in demand. This increase in demand has occurred because of new technology, an ageing population and rising expectations. At present it is difficult to see a limit on spending; total spending, public and private, on healthcare in the USA is three times as much per person as in the UK.

However, when it comes to performance compared with other countries the UK does not fare that badly. In spite of far larger spending in the USA, some of the basic measures of a country’s health, such as life expectancy and infant mortality, are broadly similar in the two countries. The United States performs better in certain specific areas, for example in survival rates in intensive-care units and after cancer diagnosis, but even these statistics are questionable. It may merely be that cancer is diagnosed at an earlier stage of the disease in the USA rather than that people live longer with the disease.

Performance can also be measured subjectively by examining surveys of public satisfaction with the country’s health service. A 1996 OECD study of public opinion across the European Union found that the more of its income that a country spends per person on health, the more content they are about the health service. This showed that, although the British are less satisfied with their health service than citizens of other countries are with theirs, after allowing for the amount of spending per head the British are actually more satisfied than the norm.9 Italy, for example, spends more per head, yet the public satisfaction rating is far lower.

There are a number of issues that currently face the NHS. The most basic one concerns the location of decision-making. This is an aspect of government policy which is discussed in Chapter 12, and largely relates to normative aspects, though there are some important economic implications in terms of resource allocation. The other issues again have both positive and normative aspects. The use of private sector providers and charges for services are important issues, again examined in Chapter 12. In terms of spending, once it is recognized that resources are limited, there is the macro decision regarding how much the state should be spending on healthcare in total. Then there is the micro question of where and how this money should be spent, and this issue essentially concerns factor substitution and opportunity cost. A number of trade-offs are relevant here, and some examples are discussed in the following paragraphs.

1. Beds versus equipment. Treatments are much more capital-intensive than they used to be in past decades, owing to improved technology. This has the effect of reducing hospital-stay times, and 60 per cent of patients are now in and out of hospital in less than a day10 compared with weeks or months previously. This can reduce the need for beds compared with equipment.

2. Drugs versus hospitals. Health authorities may be under pressure to provide expensive drugs, for example beta interferon for the treatment of multiple sclerosis. This forces unpleasant choices. Morgan, chief executive of the East and North Devon Health Authority, has stated ‘It will be interferon or keeping a community hospital, I can’t reconcile the two.’11

3. Administrators versus medical staff. In recent years the NHS has employed more and more administrators, whilst there has been a chronic shortage of doctors and nurses. This was partly related to the aim of the Conservatives when they were in office to establish an internal market (discussed in more detail in Chapter 12). The health secretary, Milburn,was trying to reverse this trend; in a ‘top-to-toe revolution’ Milburn appeared to want a new modernization board of doctors and nurses to replace the existing board of civil servants. The NHS’s chief executive, Langlands, resigned. In the hospitals also there were more administrators, and these took over much of the decision-making previously done by doctors regarding types of treatment. This became necessary because of the clash between scientific advance, increasing costs and budgetary constraints. It became increasingly obvious that rationing had to take place. Related to this issue, nurses were also having to do a lot more administrative work which could be performed by clerical workers. This happened for the same basic reason as before: more information needed to be collected from patients in order to determine the type of treatment.

4. Hospital versus hospital. Because of the piecemeal structure that the NHS inherited it has tended to provide healthcare in an inefficient way. Hospitals and other facilities are not only old and in need of repair, but in many cases small, separated geographically, and duplicating facilities. Division of labour is often non optimal. In Birmingham, for example, there is an accident and emergency unit at Selly Oak Hospital, whereas the brain and heart specialists who might need to perform urgent operations on those involved in car crashes or suffering heart attacks are at the neighbouring Queen Elizabeth Hospital. Thus the issue often arises whether it is preferable to concentrate facilities and staff by building a new and larger hospital to replace a number of older facilities.

5. Area versus area. At present there is much variation in the services provided by different local health authorities. For example, some restrict, or do not provide, procedures such as in vitro fertilization, cosmetic surgery and renal dialysis. This has led to the description ‘postcode prescribing’. Much of this has to do with the differences in budgets relative to demand in different areas, and is another example of the greater visibility of rationing.


1 Illustrate the trade-off between administrators and medical staff using an isoquant/isocost graph. Explain the economic principles involved in obtaining an optimal situation. How would this situation be affected by an increase in the pay of doctors and nurses?

2 What problems might be encountered in determining this solution in practical terms?

3 Illustrate the hospital-versus-hospital trade-off using an isoquant/isocost graph and explaining the economic principles involved in obtaining an optimal situation. In what important respects does this issue differ from the issue in the previous question? 

Looking for a Similar Assignment? Our Experts can help. Use the coupon code SAVE30 to get your first order at 30% off!