Saturday, 13 April 2013

How To Split A Restaurant Bill, and How To Reform The NHS

How To Split A Restaurant Bill, and The Future Of The NHS
Consider this question: you and nine others are going to a restaurant for a meal.  Purely on economic grounds, and assuming the time taken to pay is the same either way, is it better for you if each person pays their share of the bill based on what they consumed, or is it better if you all agree to split the bill into ten equal shares regardless of consumption?  The answer is, it depends, and I’ll explain why in a moment.

We've seen a lot of inflammatory articles recently about the supposed gradual abolition (privatisation) of the NHS - with the Tories getting much of the criticism, particularly from ill-considered, hyperbolic columnists in The Guardian and The Independent.  Now, I'm no mouthpiece for the Tories, but in fairness to them, the first assumption that needs correcting is that the degree to which NHS privatisation has occurred under the Tories is no greater than under the previous Labour Government. Irrespective of which party governs, the most important thing about the NHS is that it must continue to be free for everyone equally at the point of service. And ideally, it must also be run efficiently; and the money spent on it must be spent as proficiently as possible. This can happen in both a public and private spheres, but generally introduction of private companies needn’t be to the detriment of the NHS, because competition (when introduced well) increases efficiency and raises standards.  The often trotted out pro-public sector argument based on economies of scale is faulty, because the success of economics of scale is not based on whether an institution is private or public, but on how well it is managed.  

But there is cause for concern; because my prediction for the future of the NHS is that it is gradually going to more closely resemble one of those monolithic nanny-state structures that is run by Governments looking to penalise people for what is deemed to be excessive use of the system.  In short, they will use cash incentives to encourage us to live well. 

Who pays the restaurant bill?
In order to see how the NHS will be reformed, we need to look at the restaurant situation in more detail.  If you have a meal with nine other people, then your consumption habits probably will depend on how the bill is paid.  If each person pays their share of the bill based on what they consume, then the chances are individuals won’t over consume.  A fairly reliable rule of thumb in economics is that when an individual is able to impose some of the consumption costs on others, he will over-consume relative to a level that is maximally efficient across society.  That’s another way of saying that people respond to incentives, and if there are no incentives against overconsumption, people will over consume.  If each person pays for their own meal, then there is an obvious economic incentive to not over consume.  At the other extreme, if a billionaire Arab tells you he’s going to pay for the entire cost of all your meals then that amounts to ten people’s potential willingness to over consume. 

But what about when the bill is split evenly between the ten people – will the average consumption per person be greater or less than when each person pays for their own meal?  I’m pretty certain that if this were researched you’d find increased consumption when the bill is split evenly.  Here’s why.  Suppose you’ve all finished your main meal, and as a group of ten you are now pondering whether to have a dessert, where all desserts are £4 each.  If you have a dessert, and you’re the only one, then that dessert has only cost you 40p, because the £4 is going to be added to the bill, and thus, divided evenly between ten of you.  If everyone else is going to pay 40p for your dessert then there is equally good incentive for them to have a dessert as well.  Naturally the more people that choose the dessert the higher the average cost.  If everyone joins you in having a dessert then each pays full price for their own dessert, because the sum of dessert expenditures rises to £40 (£4 x 10 people). 

Suppose that you valued the dessert at £2 worth of enjoyment – if you were only paying your own costs you would not have a £4 dessert, because its cost is double your benefit.  If you valued the dessert at £6 worth of enjoyment, you would have a £4 dessert, because its cost is only two thirds of your benefit.  When you’re the only one having a dessert (for 40p) your enjoyment exceeds the cost; when six of you have a dessert, your enjoyment no longer exceeds the cost (because you’re now each paying £2.40 for the share of desserts consumed).  

But now assume something different; you didn’t really want a dessert, but you thought that anything from 40p to £2.40 for a dessert would be too good a deal to resist, so you decided to have one.  Generally, artificially low prices encourage people to spend needlessly and consume wastefully – so artificially low dessert prices will encourage diners to consume wastefully.  This analysis is called a ‘marginal cost’ analysis, and it follows another reliable rule of thumb, which is that if a price is set below a marginal cost, people will over consume (or, in the case of services, over use); and if a price is set above a marginal cost people will under-consume (or, in the case of services, under-use).

Suppose now that instead of all the above restaurant situations, the billionaire Arab walks in to the premises and offers every diner a choice.  He gives each diner £25, which they can spend in the restaurant, but any leftover money they get to keep.  This means that if Jill prefers to eat and drink moderately, and take home some of the leftover cash, she can; and if Rachel prefers to eat and drink excessively, and spend the full £25 in the restaurant, she also can.  This is the kind of mandate that I imagine future Governments will think is needed for reforming the NHS.  It’ll go something like this; people need incentives to not over-consume, which is linked back to incentives to live well, which is linked to a dialectic that aligns cost to choice of lifestyle (if you want to abuse your body or live excessively, then fine, but in this model it’s going to come at an incentive-based financial cost too).  The NHS reform’s big impediment is that it has got somewhat out of hand, as this would have been better implemented early on in its inception.  In other words, it’s better to pre-empt a bomb going off than to let it happen and then struggle to find volunteers to help clean up the mess.  Here’s how the restaurant illustration informs us about the future state of the NHS.

In the future, our future Governments probably will reach a stage at which the state runs the NHS and its concomitant tendering contracts through a much more rigorous central system (yes, I know, that's counter to what you might reasonably expect, but so are many future things) - one that seeks to maximise the incentive to not over-consume the health services, one that rewards healthy living, and one that manages the funds in the most efficient way. Governments will eventually realise that this can work if we have a universal health system in which the State ensures affordability of services and care through a system of mandatory savings for all earners, State subsidies for children and non-earners, and cleverly regulated controls. Each citizen that accumulates funds through earnings will generate mandatory savings that are funded by replacing the antiquated national insurance.  Already your incentive to not overuse is there because your use of the NHS comes at the expense of some of your savings.  All money not consumed on the NHS through your life will be added to your pension. Those who don't over-use the NHS can have larger pensions, and those that can't afford this are paid for by the immense net savings across the board. This also directly links your equity to your choice of lifestyle, and incentive to live longer.  By then the future Government will have developed a fairly straightforward means testing system that links taxation to revenue, overspend to insurance (and increased welfare for the most needy), and under spend to an equitable distribution used to fund those that can't pay (like children and non-earners), or those whose perennial bad health exceeds their mandatory savings.   This means people who act on the incentive to live healthily will be rewarded; people who are dependent on welfare and people who have serious health issues or bad luck with repeated health issues will be covered by the State, and people who had the propensity to misuse and show a disregard for the system will now have an incentive not to do so. 

Here's another reason why future Governments will think the reformed system will improve the overall situation - currently everyone's health care is more or less paid for from your national insurance contributions (along with unemployment benefit, disability allowances, and state pensions).  The trouble is, NI has become antiquated and not fit for purpose.  NI was originally introduced to provide cover for (primarily male) earners who endured tough economic times, by taking a slice of their wages to cover the cost of them and their family. But nowadays we have a much more diverse nation of workers, in addition to thousands of young people trapped in a cycle of benefits, Illiteracy, lack of education, lack of confidence, and ensnared by deprivation and feelings of hopelessness.  Add to that the numerous people who are beset by problems associated with unhealthy eating, and excess use of drugs and alcohol, and it will be clear that things need to change. 

I don’t disagree that incentives are good in particular cases.  Most of us can agree that currently too much of our National Insurance money is going towards things like gastric bands for the morbidly obese, cosmetic surgery for the vain, and to a much greater extent, on people in the aforementioned social brackets (particularly high users of substances, cigarettes and alcohol).  But while it’s all very well focusing heavily on the kind of poor health that is self-caused – it is obvious that a lot of poor health occurs through no fault of our own.  This point above all other points must be primary in the Government’s thinking if this future reform is going to have any success.  I say that because if the reform is actioned with the intention of not abandoning those in need, or refusing them help - it can endeavour to change the scenery over time, and link incentive with cost reduction, while still engendering an improved health service, where the NHS will still be free for everyone at the point of service, but that instead of NI, the Government will be collecting the funds to pay for it more efficiently through an improved system of taxation. 

The upshot is, if a man's excessive drinking, smoking, drug-taking and unhealthy eating etc is paid for out of the pooled National Insurance, it gives him no incentive to act otherwise - and his situation is a bit like the diner who knows anything he eats in the restaurant that night will be paid for by a beneficent billionaire.  To that end, this future reform could be successful, as long as the baby isn’t thrown out with the bathwater.  And one further caveat; I said earlier that competition is usually good for efficiency, but with ill health and injuries this causes me some concern, because when you have small-scale competition for cherry-picked services in NHS, firms tend to opt for services that are easy to manage and readily profitable.  Not only does this tendering process amount to increased bureaucracy, and excessive use of time and staff resources - it very often is awarded to poor quality low bidders whose profits are made by cheap resources, and under-trained and under-staffed units. This doesn't work so well for patients whose health is at stake, because injuries or illnesses that are complex and risky are in danger of being refused.

Finally, I’ll leave you with a tip for forecasting what the future will be like; it is based on what I like to call the ‘prescient wisdom of future ages’.

Prescient Wisdom of Future Ages
Whenever you think about reform or improvement to a system, here's a good way to approach it.  Try to consider how people in the future would do things, and try to emulate that now.  That is to say, in most cases people in the future will have developed the wisdom to rectify the mistakes and inefficiencies of those that preceded them.  That is a very succinct summary of our history of progression.  If you lived in pre-democratic times and you were the first to propound the idea that people might like to choose those who represent them, you'd have made a good contribution to humanity.  If you lived in a time when slavery was the norm, or when no one had considered things like foreign aid, or welfare, or the plight of racial discrimination, or equal opportunities for women, and you propounded wisdom to correct these aberrations, you'd have done your bit to help lift humanity onto its next level of progression.

Consequently, if you want to picture a more reformed, efficient and well performing NHS, you should consider what it will be like in the future when humanity has had more time to ‘perfect’ the constituent parts of the system.   Whether this NHS reform will be morally better or worse, I won’t say – but by then I think the Government will have worked out that just like the benefits and costs attached to paying for your own meal in a group of ten, an incentive to not consume resources doesn't just reach fruition at the level of medical service, it acts as a deterrent against substance abuse, alcoholism, heavy smoking, and unhealthy and excessive eating in the years prior to your suffering the effects.  Their big challenge will be to tackle these incentive issues, while at the same time keeping the NHS free for all at the point of service, and realising that the majority of our poor health is not our fault.