Memorandum by Reform (CVP 16)
1. ABOUT REFORM
Reform (www.reform.co.uk) is an independent,
non-party think tank whose mission is to set out a better way
to deliver public services and economic prosperity.
We believe that by liberalising the public sector,
breaking monopoly and extending choice, high quality services
can be made available for everyone.
Our vision is of a Britain with 21st Century
healthcare, high standards in schools, a modern and efficient
transport system, safe streets, and a free, dynamic and competitive
economy.
2. OVERVIEW
The premise of the Committee's questions appears
to be that there is something problematic about choice. In fact,
the real problem is the current performance of Britain's traditionally
structured public services (see Box A). The short answer to the
Committee is that it should visit the Netherlands, Sweden or inner
city Milwaukee—all of which operate successful school choice
programmes—or France, Germany or Switzerland—where
patients have choice—and ask people if they want their right
to choose taken away from them.
The fundamental reality is that the 1940s assumption
that government production of services such as healthcare and
education was necessary to ensure efficiency and equity has been
shown to be false. As Alan Milburn has pointed out with respect
to the NHS: "In 50 years health inequalities have widened
not narrowed. Too often even today the poorest services tend to
be in the poorest communities" (11 February 2003). The Wanless
report also found "evidence of inequality in access to healthcare
resources . . . People living in more deprived areas who died
of cancer used fewer healthcare resources than those in middle
or affluent areas" (Wanless Interim Report).
How organisations respond to challenge tells
you much about whether they are successful or not. In weak organisations,
managers find countless reasons for not embracing change. The
more talented and intelligent are the managers, the more such
organisations are able to find reasons not to act and to carry
on as before. In the private sector, such companies lose sales
and eventually go out of business. In the public sector, the organisation
suffers no such penalty. Instead the costs of failure are transferred
to the users of public sector in the form of higher taxes and
levels of service which would simply not be accepted in most other
European countries. All too often those most let down are the
most disadvantaged in society who neither have the cash nor the
voice to obtain something better, the very people for whom these
systems were created in the first place.
In this respect, it is very encouraging that
progressive politicians in all three main political parties are
moving in the right direction. The Prime Minister often speaks
of the importance of "choice and competition" in improving
public services and the 1999 Modernising Government White
Paper stressed the need to lever up standards "wherever practicable
by giving the public the right to choose." This summer, the
Conservative Party launched its "Right to Choose" and
was followed by some senior Liberal Democrats advocating, in the
Orange Book, amongst other things a social insurance system for
funding healthcare.
Real choice is both a social and a moral experience.
The ability to choose is intrinsic to human dignity. It turns
on free will, the capacity to choose—which is learned—and
the expectation of being able to do so as a responsible adult.
In addition to these powerful moral properties, it is economically
superior than command-and-control systems. In other words, choice
combines efficiency and equity.
3. PERSONAL SERVICES
AND PUBLIC
GOODS
It cannot be stressed often enough that healthcare
and education are not public services. They are personal services.
By their nature, they are intensely so—far more so than
many products and services currently provided purely by the private
sector. Every child is different, with different needs, ambitions
and aptitudes. The personal nature of healthcare is even more
self-evident; it is necessarily personal, intimate and specific
to the individual.
The public interest, or the public good, is
different. In the case of healthcare and schools, it is primarily
about ensuring access to quality provision for all. Defining clearly
the public interest in the provision of personal service then
naturally defines the proper role of government. It is to fund
access and provide an unintrusive system of regulation. It therefore
requires changing the nature of the government's role from being
a producer to being a funder and regulator.
It is simply wrong in fact as well as theory
to suppose that the public interest objective of ensuring access
for all can only be secured by the government taking on the role
of being a monopoly producer, as was assumed in the immediate
post-war period and which today is a relic of an obsolete and
discredited ideology. Evidence from school choice programmes abroad
demonstrates the complete compatibility of ensuring access for
all and private sector provision. In the Netherlands for example,
70% of children attend independent schools. In France, one third
of hospitals are non-stated owned and in Germany the proportion
is 50%. Both countries deliver higher quality healthcare more
equitably than is the case in Britain, not relying on waiting
lists to regulate demand (see Box B.)
Failure to define clearly the exact nature of
the public interest in the provision of personal services such
as healthcare and education and to recognise that for the most
part these are private or merit goods, not public goods, leads
to a great deal of muddle and generation of spurious problems,
as can be seen from the Committee's own paper (especially the
top of page 4). The existence of external benefits from the consumption
of private goods and services does not turn them into public goods;
if it did, virtually all economic activity could be so classified.
An example of a genuinely public good would be public health programmes
to prevent mass epidemics. Although very important, it constitutes
a small fraction of healthcare activity in this country. The starting
point therefore is to recognise the public interest element in
the provision of personal services and to focus the government's
role on it. Overwhelmingly, it is about ensuring access irrespective
of means. The proper role of government therefore is to fund access.
4. THE EMPOWERED
CONSUMER
In June the Prime Minister said: "Some
still argue that people—usually other people—don't
want choice. That, for example, they just want a single excellent
school and hospital on their doorstep. In reality, I believe people
do want choice". We agree. Too many recent opinion poll questions
have falsely asked people to choose between good local services
and "choice", when the very point of choice is that
it can and does lead to better services. More sophisticated opinion
research indicates that people do want choice (see Box C).
Furthemore the view that ordinary members of the public are incapable
of making choices that, for instance, are routinely made by purchasers
of private education or healthcare is patronising and offensive.
Choice is about empowering consumers. It means
they make the purchase decision and requires that spending power
be put directly in their hands. Cash speaks louder than words.
"Voice" is not a substitute for choice. "Collective
choice" and "government choice" (questions 9 and
10) are variants of "voice" and deny the individual
choice.
Money—unlike occasional "consultation"'
in politics, or infrequent voting, or having a say—empowers
all. This includes the poor, the old, the silent, the unorganised,
the discreet, the non-politicised; those who do not wish to join
a pressure group or be "active citizens". These mechanisms
tend to create new opportunities for producer capture and risk
further entrenchment of vested interests. The recent referendum
result in the North East and low turn-outs for votes on foundation
hospitals show what voters think about such political mechanisms
which are often, but wrongly, promoted as substitutes for genuine
choice.
Sometimes it is argued, as the Chancellor does,
that because of information asymmetries, the consumer is not sovereign
in healthcare. But if the consumer is not sovereign, who is? Few
people today subscribe to the 1940s view that the man in Whitehall
knows best, and the idea that the man or woman in the Town Hall
or some other public sector bureaucracy should exercise sovereignty
would not win public support if argued for openly.
The argument about information asymmetry misses
the point. There are many areas of life in which consumers require
specialised knowledge and advice. In a system where the patient,
for example, has the purchasing power, rather than having to act
as a supplicant for it, his or her GP or other specialist acts
for them on their behalf, guiding them through the choices and
helping them decide what is in their best interest. Instead, we
have a situation where people feel they can get lost in a system
in which no one seems to looking after them and professionals
are working to meet government targets rather than directly satisfy
the people who are paying them—their patients.
5. CHOICE AND
COMPETITION VS
MONOPOLY
Another argument made against choice is that
it is less efficient, because it costs more and requires more
capacity (top of page 3 of the issues document). The premise of
this argument is that monopoly is better than competition. It
is certainly not a view that the Chancellor—or anyone else—accepts
when it comes to the private sector, where the Government operates
a strong pro-competition regime. Both economic theory and experience
show that monopolies produce less, charge more and offer a narrow
range of services than firms in competitive markets. Furthermore,
monopolies are more vulnerable to producer capture and have weaker
incentives to serve their customers. Why the disconnect between
being pro-competition when it comes to the private sector and
against it when it comes to the public sector? There is no difference
in principle between public and private sector monopolies, except
that public sector monopolies have a demonstrable tendency to
be less efficient.
It might be that in some hypothetical static
world monopolies need less capacity than in competitive markets.
But in the real world, change is a fact of life. Innovation changes
what is possible and enables more to be offered for less. In the
private sector, companies, whether they are airlines, mobile phone
companies or hotel chains often have more capacity than they need—but
they are rewarded for finding ways of using this capacity; markets
grow and consumers get a better deal all round. This is a way
of ensuring the focus is where it should be—on the customer.
The public sector lacks this dynamic. In the
NHS, capacity is used to limit demand, rather than "excess"
capacity being used to meet demand and provide more. As a result,
waiting lists are a fact of life in the NHS and will remain so
even as Britain's spending on healthcare approaches and overtakes
the EU average. With schools, we have a static pattern of provision
where good schools are not encouraged to expand and where bad
schools are kept in being, even though they are letting down generation
after generation of schoolchildren.
Effectively liberalising and incentivising the
supply side will both cause more capacity to be made available
to consumers and improve efficiency. For this reason, supply side
reform goes hand in hand with reforming the demand side by placing
purchasing power directly in the hands of consumers.
6. CONCLUSION
The old way is not working. The costs of failure
are borne not only by users of public services, but by the economy
more widely. Despite huge increases in public spending, we are
not seeing improvements commensurate with the increased inputs.
The most recent productivity statistics for the NHS show declining
productivity, a reversal of the trend of the early and mid-1990s.
The implications are stark: each extra £1 billion of spending
is buying less.
Society has changed almost out of recognition
since the 1940s, when our pubic services were designed. Public
expectations are rising, fuelled by people's experience of greater
choice, innovation, quality and availability of new services in
the private sector (see Box D). The days when we could
expect people to queue patiently for services or accept substandard
provision without question are over.
A new approach to public services is needed.
For too long the debate has been presented as a choice between
the status quo of state monopoly or the total absence of government
support. This is a false choice. Real reform is not about withdrawing
the State. It is about changing the nature of the State's intervention
to match its competencies. Other countries demonstrate that it
is possible to deliver services with far greater consumer choice
yet more equitably than our own. To dwell on the difficulties
of injecting choice into a monopolistic system in which consumers
have no real power is to miss the real need, which is to break
down the barriers between public and private provision and redirect
the spending power of the State to consumers, so ensuring that
choice and access to the highest quality services is extended
to all.
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