One of the biggest factors disincentivising NHS improvement efforts is largely ignored
There are a number of big NHS problems that keep recurring. Hospitals often overspend their budgets; the level of capital investment is far too low; improvement efforts fail because there is no spare money for the upfront investments they need; despite a goal to spend more on primary and community care, the hospital share of the budget keeps increasing.
But might there be a single underlying cause driving all those problems?
I suspect there is a pervasive but neglected problem that explains a large proportion of all the above problems. And that problem is soft budget constraints (an idea developed by János Kornai, a Hungarian economist who used to be a central planner but later analysed why central planning failed) .
I wrote about the idea in a previous comment and was pleasantly surprised to see the Health Foundation’s Productivity Commission including it as part of their economic diagnosis.
Let me explain what a soft budget constraint is.
Consider the problem of running a widget factory in a capitalist country. You can’t force customers to buy your product. You face competition, so you can’t increase prices or skimp on quality, as your competitors will gain share if they keep prices low at the same quality. You face a hard budget constraint in the need to (at least) maintain your income. Your options are, therefore, to improve quality or reduce cost, which may both result in increased sales and/or profitability.
In a centrally planned economy, the state-owned factory will produce what the central planners request. If the factory makes a loss, it has the easier option of asking for a bigger budget. If it innovates to reduce cost and makes a surplus, the planners will simply repatriate the surplus to bail out other less productive factories.
There is no possibility of investing your surplus in developing a better product. Asking for a bigger budget is the best option available to you. This is a soft budget constraint. It is a pervasive problem in centrally planned systems and one of the major reasons for their catastrophic performance.
Deranged incentives
Large parts of the NHS behave like factories in a centrally planned economy. Hospitals have long faced soft budget constraints and are routinely bailed out if they overspend their budgets. The side effects of this are catastrophic because they undermine the foundational incentives needed to improve NHS productivity.
A major explanation for the NHS’s perpetual shortage of capital spending is that the system allows that budget to be treated like a contingency fund for bailing out overspending organisations. Since capital spending is a major driver of productivity, this is a catastrophe.
But the derangement of incentives hurts improvement efforts in many other ways. It is also a major reason why the (non-capital) investment needed to kickstart any improvement is in short supply. If the NHS tolerates hospitals once again over recruiting doctors and nurses, then it has to cut something else next year to cover the overspend.
The NHS has long sacrificed the force multipliers that make the front line more productive because of the combination of bailouts and the widespread but false belief that only more frontline staff can drive higher activity
Perhaps the leaky theatre roof won’t get repaired, limiting the amount of surgery that can be done with all the extra surgeons. The obsolete scanners won’t get replaced, limiting the diagnostic capacity. The upfront budget needed to kickstart the project to design a higher-capacity pathway will disappear, leaving productivity stuck. The managers who operated an effective waiting list process will get fired and patients will wait longer.
Those hospital leaders who spend the money well get no benefit. Their budgets will be raided to cover the deficits of their impecunious peers. GPs and community services don’t usually overspend. Hospitals often do, sneakily grabbing a larger share of the budget, undermining NHS strategies demanding more spend in the community.
The fix for soft budget constraints is insisting on tight financial discipline and improved incentives. But this can be extremely uncomfortable as it would include constraining spend on clinical staff. The NHS has long sacrificed the real force multipliers that make the front line more productive because of the combination of bailouts and the widespread but false belief that only more frontline staff can drive higher activity.
Another fix to the broken incentives would be to allow hospitals to retain their surpluses as foundation trusts used to do. Arguably, financial discipline is improving, but there are still many rumours of large system overspends and too few incentives to prevent them. The system needs to move faster and more ruthlessly to eliminate what might be the largest factor undermining the incentives to improve.
