Healthonomics:

This is a frequent phenomenon called Gammon's Law (after Max Gammon), which follows a predictable pattern whereby increase in expenditure will be matched by fall in production, where the more resources a system swallows up, the less efficient it becomes in terms of production per unit of investment. Pretty much any big centralised institution - health, schools, taxation, the EU, the church - when it gets so big that it passes through the efficiencies of economies of scale and begins to suffer from diseconomies of scale (see also the Dunbar number) will show a pattern whereby increased input produces decrease quality of output. In economics, the Rahn Curve (named after American economist Richard W. Rahn) is a graph that illustrates that there is a level of state spending that helps increase growth rates, but that there is a point over which it reduces growth rates. 

Research from the Cato Institute indicates that when government spending expands beyond about 20% of GDP, economic growth diminishes. This often works alongside Gammon’s law, where increase in expenditure will be matched by fall in production, and where resources get sucked into a black hole of diseconomies of scale and the overall production as a ratio of resources inputted diminishes. At the time of writing, the NHS has 1.6 million employees, and there are 66 million people in the UK. That means there is one NHS worker for every 41 people in the UK. You recall we mentioned Wagner's Law, which observes that with increasing economic growth we generally see a rise in state expenditure. Research by the Adam Smith Institute revealed that the total health budget exceeds £100 billion a year, and that management staff numbers increased by about 12% over the past five years, while the number of frontline staff increased by only 2%. It seems clear that the UK's NHS could be managed better: it appears to be simultaneously falling foul of the dangers of Wagner's law, post the optimum point on the Rahn curve, and exhibiting the kind of inefficiencies that Gammon’s law portends.

But whether it is the right type of system being sub-optimally managed, or the wrong type of system altogether is a complex question - not least because the question of the right size of government is an even more complex question. This is due to the fact that humans are adaptive, goal-oriented beings involved in a complex social nexus with lots of incomplete information. And consequently, the wisdom of central intelligence sometimes serves the system best, and other times it is best left to the price systems in the market. 

The challenge, as ever, is to find a way to incorporate the qualities of a kind of socialist-individualist-libertarian triumvirate at the personal level with the qualities of the free market and its concomitant mechanism for price theory to efficiently balance supply and demand. I am naturally sympathetic to a system that draws from the efficiencies of market prices, but I believe that good health care is essential to individual well-being and society's ability to thrive, and no one should be without it, especially society's poorest and most vulnerable people. I'm friendly towards a system in which taxation is collected to fund health care for anyone who is poor and can't afford it, to fund research, to subsidise low earners, to support vulnerable people, and to provide a safety net for every single person who needs it. A nation that doesn't start with that premise is ignoble. But given this as a sine qua non, there are some more complex elements to health care that need addressing. I'm not sure that any health care system that's ever been created is efficient and comprehensive enough to manage the full gamut of complex human needs without sub-optimality in some of its parts - and therefore, the studies that compare different nations' health care systems and look to highlight the relative strengths and failings are probably of limited scope. I think any analysis of health care is (distally) also a study of human society, and is going to have to include the concession that it impossible be maximally efficient and get everything right.

In my estimation, the most efficient healthcare system would be one that reflects the spirit of community libertarianism: that is, it has all the efficiencies of market-based allocation of resources and competition, but it is provided under a framework that reflects a health service free at the point of delivery for all, so no one, rich or poor, ever has to worry about not getting the range of health care they need. Consequently, I think the market is not fully equipped to tackle the complex problem of health provision. 

A typical libertarian argument is this: Doctors are professionals; they know things about our health that we do not, and they can make us better, which is why they command high salaries. Patients, on the other hand, are professionals too - they are professionals over their own lives. But when it comes to our health and well-being, we should approach this kind of reasoning with caution. There is a lot we don't know about our health, our future needs, how our behaviour affects others down the line, what viruses may be lurking round the corner (Edit to add: think of Covid-19 as a prime example), and how much health care we are going to need throughout our life (especially in old age). Even if it an imperfect model, there may be some mileage in preferring a centralised health system, as long as implicit in that framework would be a scenario for individuals where their preferences and their expenditure are more closely aligned. 

The main reason that the healthcare considerations are too intractable for purely bottom-up local market management is that health is a far too complex lottery to reflect the same incentives and value created by the market. Through no fault of their own, some people will have the genes or misfortune or accidents that mean they cost the health service tens of thousands of pounds, whereas others will go through life costing virtually nothing. A civilised society should be one that cares for all its citizens equally, giving everyone the security of healthcare that's free at the point of delivery. A health system that resembles an insurance model with coverage funded by pooled resources is a must in a society that purports to provide a security net for its citizens. The thought of a society that bases health care on what people can afford is one that should be repudiated at every level. When it comes to health, there are some outcomes that some individuals have no chance of managing without the pooled resources of others - and the bottom-up market system doesn't contain all the information needed to factor in the range of complex human health needs.

As an economist, I believe the market solves a lot of the problems a lot of the time, but not all of the problems all of the time. But I think human health (for different reasons to defence and rule of law) is a problem that needs top down centralised information processing, because it doesn't have the foresight required to capture the diverse range of human needs. A society that successfully cares for the complex needs of human health and well-being cannot be at the mercy of market-driven supply and demand computation, which is subject to chaotic instability and power law distributions that would be inimical to comprehensive health provision if left unchecked. It's not often I'll endorse a Marxist principle, but when it comes to healthcare, I think a tolerant and compassionate society should deliver according to the Marxist principle of “From each according to his ability, to each according to his need”. I think the only model that can satisfy this is one in which every worker contributes to a health insurance scheme regulated by the government. Higher earners may if they wish opt for private insurance, and insurance companies can compete for business to provide customers with cover. This would take out the politicisation of the health system.

A system in which most health care insurance was run independently by private operators, where providers would compete with other providers for patients based on price and quality of service, can form part of the national health framework. After all, many private companies successfully provide goods and services for public health institutions. Under a benevolent libertarian system, some providers would be part of big corporations, whereas others would be large cooperatives, and others still smaller businesses specialising in particular practices. There probably would even be many charitable organisations funded by benefactors. This would also open the market for insurance companies to offer incentive based premiums for a diverse range of people with diverse lifestyle choices (and no, I don't mean like the cost inflation-inducing American insurance system). It might be a health system rather like that of a shopping mall, where doctors, dentists, pharmacists and opticians are linked together by a nexus of industry and efficiency, where prices, supply, demand, value and incentives are more coterminous in their relations. 

If that seems like moonshine, remember, someone in the 1950s would be quite astonished to think that you could walk in to a supermarket, scan the goods in your basket and tap a payment card on the sensor to complete the transaction. Imagine in the future when money earned and money spent on health care can be so much more prodigiously efficient thanks to advanced technology. An awful lot of positive developments in society are made possible by life-changing technology. Think of any detective movie in the old film noir era with Humphrey Bogart and Robert Mitchum and imagine how much easier their cases would be to solve with a smart phone. Think of how much easier the protracted scientific revolution would have been if all the exponents had laptops and the Internet. Think of how much quicker the Industrial Revolution would have gathered momentum with more advanced electrical and combustion capabilities.

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, 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.

In summary
There must be a negative effect on any health service model because of those who use health care too much because of bad decisions (alcoholism, smoking, drug use, binge eating), making supply shorter for the majority who need health care through no fault of their own. The system might be more efficient if people who make these bad decisions pay a higher insurance premium. But I'm not sure there could be an efficient top-down system that could be less costly than the extra costs these people would cost a public health service. Equally, a health care system, like a car insurance system, that said 'yes' to every single claim everyone wanted would be providing too much health care and costing the nation too much money, so there needs to be an optimum amount of health care provide. For example, if everyone visited the doctor every time they had a cold or a blister, the GP surgeries would be inundated beyond the capacity to cope. And I'm very sceptical of large scale operations that try to operate with the dual mandate of serving the public and trying to be financially profitable - you usually get the worst of both worlds, where failure to serve the public well enough is blamed on the financial pressures of solvency, and the failure to remain financially solvent is down to the pressure to serve the public to full capacity.

Given the complex nature of health, human physiology, diseases, infections, health prevention, research and future unknowns, I have a feeling that healthcare is one of those institutions where public service must take precedence over tight financial regulatory, and that we might just have to accept that erring on the side of generous expenditure to cover pubic need is a requirement for the kind of healthcare coverage that provides the safety net that gives everyone free health care at the point of delivery, and the peace of mind too. I'm not denying that every effort should be made to ensure money is spent as prudently as possible. But in terms of outcomes, quality and efficiency, a healthcare insurance system that combines the universal 'free at the point of delivery' safety net of a public service with the consumer sovereignty, competition and the innovative dynamism of a market system looks to be the one that will give citizens the closest approximation to what they need. The free market can do a lot to reduce inefficiency in society, but markets can't do everything - they involve people responding to the incentives that markets and free enterprise provide - but health is likely to remain far more complex than that, and should continue to yield to a model that prioritises a compassionate ethos, peace of mind, and safety net.