The funding of the National Health Service: what is the problem and is social insurance the answer?

Whenever the British National Health Service (NHS) appears to be short of money, the medical, political and proponents of various forms of alternative financing for health care enjoy a resurgence. What would be the economic effects of changing the financial base of the NHS from general taxation to a system of social (or National) insurance? The main effects of such a change can be summarised as first, a regressive redistribution of post-tax income from low earners to the better paid, second, an increase in the supply of labour from low income groups and possibly a reduction in the supply of labour from higher income groups, third, a reduction in aggregate demand and a fall in the demand for labour which may increase unemployment, and, finally, if forward shifting of the tax is assumed, a higher price level. Apart from the tax changes detailed in Section 3, all these effects are qualitative and their precise size will depend on the new tax schedule an the nature of the shifting of the employers’ part of the new tax. As with the proposed Poll tax, the regressive nature of the social insurance system could be mitigated by a progressive tax schedule. However, such a solution would increase the administrative costs of collecting tax revenue and offer no solution to the resolution of the problem of how to achieve a consensus over the level and nature of health care provision. The debate about health care finance leads policy makers into blind alleys. The proper area for policy debate us how, whatever the mix of public and private finance, can efficiency in the use of scarce resources be achieved? To achieve efficiency it is necessary to provide care up to the point where the value of benefits (enhancements in the duration and quality of life) just equals the costs. Unfortunately in all health care systems benefits and costs are unknown and the efficiency of health care provision is impossible to determine. The resolution of such problems would not only be useful in identifying “value for money”, but also whether health care is actually improving the health of citizens.