Competition in healthcare will mean state subsidies for private firms
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Version 0 of 1. The widespread shock that greeted the news this week that the healthcare market regulator, Monitor, might recommend that private companies providing NHS services should be exempt from corporation tax is understandable. Most people still don't think of the NHS as something that must above all yield profits for investors. But Monitor is tasked with creating a market in healthcare and faces the problem that making money out of acute (hospital-based) healthcare is very difficult unless the state stacks the cards in favour of profits. The main reason for this is that in most markets, making profits depends on innovative labour-saving technology, whereas providing good healthcare is unavoidably labour-intensive. One solution is to give a company a local monopoly, such as being the sole provider of all NHS community services for a given area, as Virgin now is in Surrey. Another solution is to provide a subsidy, such as an exemption from corporation tax on profits. This solution was on the table because creating a market in acute care is much harder than in community care. Hospitals are sophisticated operations that require investment in expensive plant and expensive staff. Some 30 NHS hospitals, such as Hinchingbrooke in Cambridgeshire, have been brought to their knees financially by PFI schemes or other errors. Circle is currently the only private provider managing an NHS hospital trust – the aforementioned Hinchingbrooke – but many others could be offered to private companies to take over. But most NHS hospitals are well run and don't have to pay dividends to shareholders. In competition with a private company this certainly gives them an advantage. But to call the fact that they don't pay corporation tax "unfair", as the private sector does, is really to say that not having to make a profit is unfair. Absurd as this sounds, it makes sense to the market mindset. Monitor doesn't say this. It says that "in some circumstances certain provider types are, as a result of their corporate form, subject to additional costs compared to other providers. This may in turn result in them finding the costs of expanding or entering a new market to be prohibitive". In other words, corporations need some kind of subsidy if they are to compete with NHS hospitals – tax revenue that could otherwise be spent on patients. The corporation tax proposal didn't get very far. Days after the Monitor story was reported, the regulator has now stated that: "While it is the case that corporation tax is one of many distortions the review is looking at, Monitor will not be recommending private sector providers should be exempt from paying corporation tax." The Treasury would surely worry about the precedent – if private hospital chains such as BMI or Ramsay are exempted to induce them to compete with NHS hospitals, will G4S demand exemption in order to compete with HM prisons? And determining the share of a company's total profits that should be exempt from tax would be a tax-avoidance lawyer's paradise. But some kind of subsidy seems likely to be proposed, and other measures to favour private providers are also being pushed forward. One is allowing variations in the tariff – the fixed price set by the government for every NHS treatment to prevent loss-leading bids by private firms from destabilising the hospital system. The Department of Health's guidelines for 2013-14 allow commissioners to "agree" below-tariff prices for the kind of high-volume, low-risk procedures typically offered by many private providers (hernias, varicose veins, knee and foot surgery, etc). Not to lower the price allows such providers to make super-profits, since they don't also have to provide higher-cost, higher-risk treatments; but allowing them to charge below-tariff prices gives them a clear advantage. The guidelines say this can't be regarded as cherry-picking, but it is hard to see what else it is. Commissioners are told to "give consideration" to paying above-tariff prices to NHS providers who will be left with the more costly work, but they have no incentive to do so. The effect will be to divert funds from NHS hospitals to shareholders. By 2015 this degree of price competition will have become normal. So, most likely, will subsidies. A strengthened private sector will then push for further assistance. Unless Ed Miliband and Andy Burnham return to office and honour their promises to repeal the Health and Social Care Act we must be prepared to see more and more of our healthcare, including hospital care, provided by for-profit corporations, with the rise in cost and loss of quality that invariably follows. |