Public sector outsourcing dies a slow death, the nationalisation zombie rises from the dead.

The public sector outsourcing market died another death this week with the news that the UK’s Probation Services (or Offender Management as they are now called by wacky bureaucrats) will all come back in house:

This isn’t entirely news as the problems with Criminal Justice outsourcing have been know about for several years:

On this occassion I make no apologies for quoting exclsively from the Guardian. It isn’t the great paper it once was, but it is still the best UK news source for public policy, particularly social policy. I’ve also covered the crisis in the UK public sector outsourcing industry for several years:

If you don’t want to read all of those links I can summarise for you:

Outsourcing Criminal Justice is an inherently stupid idea.

Outsourcing works well when you an transfer risk to the contractor in return for which they make profit, and where you can specify the outcomes you want without creating perverse incentives. You simply can’t do this with criminal justice in the way you can with processing applications, or dealing with telephone queries.

The Tories right now are doing a much better job of dismantling the UK outsourcing market than the Labour Party are, despite the launch this week of another set of jumbled proposals for the re-nationalisation of utilities.

I am pretty happy with the transfer of the utilities back into public ownership, along with big chunks of the Railways, with the proviso that I don’t like “all-in” or “all-out” models, I like a mixed economy with public and private competing, but with HMG maintain a market making stake.

I realise that I am conflating outsourcing with privatisation, but in this case the decisions to outsource/privatise vs in-house/nationalise are based on competing ideological views not on a well thought out set of ideas about the best way to deliver public services.

There are some really big things that Labour need to avoid when designing re-nationalisation proposals:

  1. Don’t use “leveraged buyout” style deals that load debt onto the newly re-nationalised industry. This will prevent them from future borrowing to fund capital investment (the lack of capital investment was always the problem historically with nationalised industries)
  2. Don’t try to hide the cost of these re-nationalisations using off balance sheet transactions. The public need to know clearly the cost of the re-nationalisations so they can judge if they are value for money
  3. Don’t recompense the former owners with Bonds that pay out an income. This is basically all of the problems of PFI without actually creating new assets

Labour’s original proposals had all of these problems:

A hopeless jumble.

It looks like the lateset set of proposals are a step forward, in that they are on balance sheet transactions, but still involve PFI style bonds, and still load debt onto the nationalised industry which will limit future investment.

The scale of the debt loaded onto the books of the newly nationalised will be reduced because Labour plan to pay less than the market value of the shares in the utilities to reflect investment, pensions deficits and historic profits. There is a precedent for that. In 2002 Railtrack got into financial difficulties and the Blair Government nationalised it, paying shareholders £2.50 a share – much less than the £9.50 that they claimed it was worth.

Railtrack haircut

The shareholders took the Government to court and the case dragged on for 4 years before the Government won.

The Utility companies are in much better shape than Railtrack was (it was insolvent and had £7bn in debts when the Government stepped in), and the fight from the Utilities is likely to be much stronger and a lot longer

Just as the Tories are killing off public sector outsourcing by putting ideological dogma above good policy making Labour are setting up re-nationalisation to fail by down exactly the same thing.

So far the Tories are making a great case for Nationalisation while Labour are making a great case for Privatisation. It’s almost as if they are both utterly and totally incompetent.

The economics of doing the right thing

One of the greatest ever papers published in a history journal was written by Jan Vansina for the Journal of African History

Vansina makes the very simple argument that the abolition of slavery increased labour costs. These increased labour costs in turn made it more attractive to invest in mechanisation and industrialisation. And the increased investment in mechanisation and industrialisation created faster economic growth.

The countries who abolished slavery earliest, including the UK, had the fastest economic growth over the C19th. The countries who abolished slavery last, such as Portugal (and those whose economies were the most reliant on slavery), had the slowest economic growth.

I always thought Vansina’s argument was a bit limited – slavery wasn’t really a feature of the economy of the British Isles, it was mainly confined to the Colonies in the Americas, while the investment in mechanisation and industrialisation was in the domestic economy not in the colonies.

But despite these limitations I still love Vansina’s thesis – it is elegant and illuminating

And Vansina’s argument does work. It even works if you apply it more broadly across the Americas: The Northern States which didn’t have slavery were more industrialised and had faster growing economies than the Southern States (this is one of the reasons why they won the Civil War). The USA was less reliant on slavery and faster industrialisation and growth than the South American states who had a greater reliance on slavery and plantation agriculture in general.

The reason why I went back to Vansina is because of a fantastic row which is taking place in the Economic History Review about the extent to which high wages in C17th and C18th England drove increased mechanisation and industrialisation. The debate is largely around whether Britain had higher wage costs than competitors like France. This is the hottest debate I can ever recall in an academic field that is dominated by graphs and tables.

Instinctually I believe the high wage argument. In the centuries before industrialisation the rich and powerful had consolidated land ownership, building the familiar pattern of stately homes and large estates. This left a surplus rural population who were driven off the land, by force if necessary. In Scotland we call this Highland Clearances, in Ireland the Plantation System, and in England the Enclosure of the Common Land. These surplus populations were transported, willingly or unwillingly: The English as criminals to Australia, the Irish as bonded labourers to America, the Scots to Canada.

The combination of an artificially restricted Labour Market and the suppression of the Slave Trade following the Somerset Judgement pushed up wages, in particular for skilled workers in the emerging urban areas. (I’m going to do a short follow up piece on Somerset v Stewart 98 ER 499)

My family were some of the people who benefited from this. They were weavers and textiles workers in Prestwich, then a village on the outskirts of Manchester, and they became more prosperous, some ending up as landlords and mill owners.

I think that there is a bit more behind the industrialisation of the UK, in particular the availability of capital. British capitalists had access to more capital than their competitors because they systematically took the capital of other countries to invest at home, in particular India. We weren’t the only country to expropriate other countries wealth, but we used that wealth to industrialise the nation rather than make gold statues for the Pope.

But above all it was the mix of the 2: high labour costs and easy availability of capital which encouraged mass industrialisation, which came to define the UK in the C18th and C19th.

Why is this important?

Very quietly the Government has been meeting with the TUC on a plan to increase the National Minimum Wage to £9.61, the highest in the world, and a massive step towards tackling in-work poverty. They are in competition with the Labour Party whose last manifesto included an commitment to a £10 an hour NMW. This is over and above the Government’s commitment to a National Living Wage.

For those interested in policy detail the NLW is defined a 60% of median earnings, and the NWW rates both the Government and Opposition are suggesting would represent over 66% of median earnings, which would push the NMW just above the OECD definition of low pay.

The National Minimum Wage has been such a huge success, so much so that both political parties are fighting for their own version of a National Living Wage that would end low pay. I would rate the NMW as one of the greatest achievements of post war Socialism, and one of the most successful Government policies of my life time.

Despite this The Office of Budget Responsibility have estimated that even the Conservative Parties less ambitious target would cost 140,000 jobs.

This isn’t the first time that the OBR have forecast lob losses like this. The introduction of the more limited definition of the National Living Wage in 2015 was forecast to cost more the 40,000 jobs, and yet it is really hard to spot these job losses anywhere in the economy.

Measuring the rate of job losses due to increases in the NMW/NLW is tough for 2 reasons. Firstly because the unemployment statistics are pretty badly cooked these days, to disguise high levels of underemployment and poverty in the working population. Increasing the NMW to £10 an hour isn’t going to end in work poverty for people aren’t working enough hours to make a difference .

But secondly because employers have been shifting insecure low wages jobs to self-employed in order to avoid the NMW. Uber and Deliveroo have both recently lost court cases forcing them to recognise the employment rights of their workers, but bogus self employment is an increasing feature of the UK economy, albeit one slightly declining at the moment.

Despite my scepticism it is clear that something good is happening in the UK Labour Market, and employment is at high levels despite the Government fiddling the numbers. Treating workers well, giving them better pay and conditions encourages more people into the Labour force, which in turn gives more choice to employers. Businesses with a ready pool of motivated workers find it easier to expand and grow, and the economy grows with them.

Wage increases are still low, which has perturbed economists, and is linked to low levels of capital investment. If increased levels of wages lead to high levels of capital investment and higher economic growth then logically an economy like the UK with low wage growth should have low levels of capital investment and low growth. This would explain why low interest rates haven’t led to higher levels of investment or growth.

But there is one final factor in wage growth that struck me when looking at the proposed rises in the NMW/NWL. As the NMW gets higher it draws more and more workers in. And the workers who have a differential above the NMW are effected too.

A £9.60 NMW means that a quarter of the UK workforce will have their wages set by the Government. When you add to that more highly paid employees whose wages are set by the Government in the public sector we have reached a situation where HMG sets the wage rates for more than half of Britain’s workers, even allowing that some Public Sector workers will be on the NMW.

A generation ago this would have seemed like a crazy socialist scheme, and yet we have a supposedly right wing Tory Government endorsing a plan to have the Government set wages for most British workers. The National Minimum Wage really was one of the most transformative ideas in modern British politics.

We have a highly regulated labour market with the Government set the wages and conditions for the majority of workers and close to full employment. Truly this is a Socialist Utopia!

If the Government really wants to tackle low pay it doesn’t have to look very far for solutions. It can simply mandate changes to pay.

As a final comment we have been conditioned to believe that the right thing ethically and the right thing economically are always in conflict, and that Government attempts to deliver a fairer society always have negative economic consequences.

The OBR can be forgiven for making the assumption that fairer wages lead to job losses because the are obliged to use an macro-economic model given to them by George Osborne, someone who has only been out of power for a few years, and yet whose ideas already seem paloe-economic.

But when it comes to Labour markets treating people better, paying them more and giving them more rights in the workplace is a good way to create a more flexible workforce, which is good for businesses. Higher wages leads to a faster growing economy.

Maybe it’s time to think differently about how we make the arguments for progressive politicies?

I can’t get no satisfaction (ratings). Does public satisfaction with the NHS relate to how much the Government spends on it?

First of all an apology. There is a lot on at work, and a lot of stuff happening behind the scenes, and this has got in the way of blogging.

The data from the last set Social Attitudes Survey is out, and people aren’t happy with the NHS.

This might not come as a surprise to people because it is pretty well known that the last 8 years have been lean years for the NHS in terms of funding increases. In fact this has been the longest period of funding restraint in the Service’s history, so no surprise people aren’t happy

Lets have a look at a graph shall we?

There is a really stark difference between the 2 halves of the graph. The left hand side reflects the Conservative administrations of Margaret Thatcher and John Major, the right hand side of the graph the New Labour years, then the Coalition, and, finally, the Cameron and May Conservative years. People are much happier on the right hand side of the graph.

The really good scores are from the era was when I was a senior NHS manager. Definitely not a co-incidence

There are three things that really jump out at me.

Firstly that while the Labour Party started spending serious amounts of money on the NHS from 2000 onwards (the publication of The New NHS: Modern and Dependable), the improvement in patient satisfaction is a few years later. Patient satisfaction is clearly a lagging indicator.

If you want to test that against against funding this is a neat graph from the Institute of Fiscal Studies which shows a similar pattern, although it covers a longer time period

Secondly satisfaction doesn’t correlate with the number of Doctors. Patients love Doctors, in fact they love all clinical staff, and I did wonder if there was a correlation between Doctors per head of Population and patient satisfaction (apologies to Nurses and AHPs for using Doctors/Population as a proxy for Clinical Staff)

I’m a bit confounded by that graph which came from the BMJ, which shows that increasing Doctors numbers doesn’t seem to have any relationship with patient satisfaction.

Finally the numbers for the Coalition and the Conservatives are much better than I expected. Given the awful levels of funding increases we saw under Cameron and May I would have expected . People were happier with the NHS when Cameron and Osborne were putting in less than 2% per a year, than they were when Thatcher was putting in 2.5%.

There are 2 possible explanations for this.

One is that the big cash increases that came during the New Labour years uplifted the baseline level of satisfaction and it will take a long time for this to decline. The other is that the NHS has done something, probably during the Blair years, that made it more customer friendly. This seems unlikely, but I do think that the spending increases in the Blair years renewed Britains love affair with the NHS

Lots of my Clinical friends will of course want to ask the obvious question?

“Why does this matter”

And in one sense it doesn’t matter. No patients got better because of a good survey result, no lives got saved.

This is of course true, but it’s worth dodging back in time to the Blair Government’s decision to put a huge amount of extra cash into the NHS.

At the time the Government was worried that support for public services was in decline. People were getting a poor service from the NHS, from schools, from public services in general, and once Labour had been in power a couple of years it wasn’t tenable to keep blaming the Tories.

Labour were scared that public support for universal public services like the NHS was in such steep decline that it would threaten their existence. The great threat to the existence of the NHS isn’t privatisation (as many on social media claim) it is lack of public support.

Labour wanted universal public services, but also wanted to maintain public support for more money

The solution was more cash + more choice + higher levels of satisfaction.

This was the classic Blairite triangulation and it was applied across public services. Taxpayers were asked to put record amounts of cash into public services like the NHS, in return for which they were offered greater choice about how they accessed those services, including the opportunity to access private Hospitals paid for by the NHS. The end result was meant to be better results – better mortality and morbidity but also better satisfaction ratings.

The same troika applied to other public services like Education too.

That’s why this matters. Because looking at the right hand side of the graph May is pushing some decent sized increases of cash through the service over the next few years, not quite Blair levels, but well above the Thatcher/Major/Cameron settlements. A lot more than Corbyn offered too.

Getting this extra cash took years of fighting with Treasury, not just by Hunt, but by Simon Stevens and lots of other senior NHS managers.

I don’t know what promises were made to Treasury in order to get hold of the cash, but they are likely to be pretty strict.

At the same time performance targets have been suspended for A&E performance because overall performance has declined sharply. The 4hr wait target hasn’t been hit for a few years now.

More money + declining satisfaction + worse performance is a tough mix for the Service to handle. I am not sure that Matt Hancock is the kind of Consigliere that May needs to finesse this kind of funding and performance squeeze.

The NHS should have had an idea of what it had to achieve for the new money when the NHS Long Term plan was launched earlier this year, however the plan requires legislation, and more detail, and these are now logjammed by Brexit.

The Long Term Plan website is still describing the Plan as proposals, and there has been a subsequent Implementation document, which sets out further work that is needed. This is classed as an engagement document, which I think means that it is for consultation, but that DH reserve the right to ignore the results of the consultation if they don’t like it. This jumble is a big difference from the Publication of the NHS Plan in 2000

The whole thing looks like a political storm brewing for the Service, with more money, a lack of clear direction, worsening satisfaction, declining performance and an angry Treasury.

Hopefully back to more regular blogging soon!

Dismantling the NHS Internal Market by stealth. The Nationalisation Ninjas

People in the NHS continually complain about re-organisations. The endless churn and change of job titles, letterheads and lanyards.

The reason for this continual mess can be traced back to the original sin of NHS management – the introduction of the internal market – the purchaser/provider split in the 80s. Pretty much ever re-organisation since then has been trying to make sense of something that never made any sense in the first place.

Despite all of the memes you have read on social media about evil capitalists privatising the NHS the reality is the opposite. There is very little appetite for the private sector to get involved in the NHS. That’s because the NHS is complex with unpredictable patterns of patient flows, which makes it hard for private companies to make the stable predictable profits their share holders want.

This lack of enthusiasm meant that the incredibly expensive structures of the internal market are really just used to move money from one bit of the public sector to another at great expense.

The 2012 Health and Social Care Act, often known as the Lansley Act tried to address this by introducing the compulsory tendering of services to the private sector. This was supposed to increase private sector interest by allowing them to take over less volatile services.

I have a fundamental problem with this. I honestly don’t mind the private sector bidding to provide NHS services as long as they invest their own capital and take risk on that capital. That’s why it’s called capitalism

The Lansley Act allowed the private sector to take on services and make profit using the NHS’s own capital. This is fundamentally wrong. This isn’t capitalism, it is some kind of weird state corporatism of the kind we saw in the 1930s in Italy and Japan.

The private sector did indeed take on more work, but the costs of administering the tendering process, the costs of the bureaucracy and the consequent costs of legal challenge made the whole thing uneconomic. I could have told them that at the start.

The current Government has put more money into the NHS. Embarrassingly they are currently putting more in than Labour promised in their 2017 manifesto.

There is a bill being drafted to go to Parliament with the proposals for how the new money will be spent.

Sharp eyed readers of board papers will have spotted that NHS England had a board paper this week called “Building the case for primary legislative change” . I understand that these proposals have Ministerial and Select Committee support and are likely to go through.

The proposals in the paper go way beyond the long term plan and have some very radical proposals:

“We consider that it should be possible for NHS commissioners to arrange for NHS trusts and NHS foundation trusts to provide services without necessarily having to advertise these services and seek expressions of interest from the wider market. We propose that the regulations made under section 75 of the Health and Social Care Act 2012 should be revoked and the powers in primary legislation under which they are made should be repealed”

“we also propose that arrangements between NHS
commissioners and NHS providers are removed from the scope of the
Public Contracts Regulations”

“We are proposing legislative changes that could nonetheless
help provide more flexibility in developing new payment models…. removing the current ability for providers to seek NHS Improvement’s agreement for unilateral local modifications to national tariff prices, so that the onus is on providers and commissioners to agree any local variations to national prices”

“Through the development of ICSs, commissioners and providers are increasingly coming together to plan services in a much more collaborative way. Some local health systems have expressed interest in going further and bringing some services together under the responsibility of a single provider organisation, supported by a single contract and a combined budget….. Where it is difficult for commissioners to identify an existing organisation that could take on responsibility for an integrated care provider contract, we propose the Secretary of State should be given clear powers to establish new NHS trusts for the purposes of providing integrated care. Taken together with the procurement changes we propose, this would support the expectation in the NHS Long Term Plan, and the Health and Social Care Select Committee’s recommendation, that the Integrated Care Provider (ICP) contract should be held by public statutory providers”

“We are therefore suggesting proposals to promote collaboration by removing the legal barriers that limit the ability of CCGs, local authorities and NHS England to work together and take decisions jointly.”

Apologies for the long quotes, but this is radical stuff. This not only takes a sledgehammer to the 2012 Act, it actually starts and unpicks bits of the internal market. There was a brief moment in 1997 when Labour under Frank Dobson proposed this, but this was shelved for being too radical.

I realise that there are some rather misguided concerns about Integrated Care Systems, not helped by hopeless on line campaigns and petitions, but they offer the most immediate prospect of local areas dismantling the entire internal market.

Quietly NHS England are proposing some radical ideas. Hot stuff. Or at least as hot as health policy ever gets

More nails in the coffin of public sector outsourcing

Yet another outsourcing company gets into trouble.

I don’t think that many people will be sad to see the back of Working Links as they lose their probation services contract.

It looks like they might not be the only ones to lose their contract in the weeks to come – of the 21 Community Rehabilitation Companies only 2 are achieving their contracted outcomes.

I’m not opposed to outsourcing of Government work like some people – using Government spending to boost the private sector and the overall economy is a sensible Keynesian idea, and there are plenty of bits of routine Government admin which could be done more cheaply using surplus capacity in the private sector.

But I do think that there are some parts of the Government which should never be outsourced. When considering whether something should be outsourced there are 4 key questions to ask:

  1. Can you transfer delivery risk to the private company – if something goes wrong can you hold them to account for their performance and make them fix it? The failure of Group 4 to deliver their contracts for the 2012 Olympics are a good example of this – the risk stayed with the Government no matter what the contract said, and Army ended up doing the job instead
  2. Can you commercialise the activity and turn it onto a contract with clear outcomes without creating perverse incentives?
  3. Is there an existing market for this service? Are their commercial companies out there with expertise in this business area?
  4. What are the commercial partners bringing to the deal? Capital? Investment? Expertise?
  5. it is impossible to transfer delivery risk to the private company
  6. It is impossible to commercialise the activity and create a contract for it without creating perverse incentives
  7. There isn’t an existing market for these services, and potential contractors don’t have experience in this business area

Criminal justice is a terrible business area for Government outsourcing because it has all of these problems – the risk stays with HMG no matter what the contract says, the contracts create perverse incentives, the private sector has no experience in criminal justice, and they don’t bring anything meaningful to the deal.

But it is also a terrible area for outsourcing companies to get into because their investors want predictable stable returns which are impossible to deliver with a volatile and unpredictable client group.

I worked alongside charities who were bidding for these contracts a long time ago and the commercial terms they were being offered were heavily weighted towards achieving specified outcomes for the ex-offenders.

Failure to achieve these outcomes was existential – it would drive the charity out of business. But getting predictable outcomes from an unpredictable client group was nigh on impossible.

This meant that only businesses of a certain size and structure could win these contracts, and even then, as the collapse of Working Links shows, a small variance from expected outcomes made the contract commercially unviable. This was the heart of the problem with Working Links who look to have been manipulating their contract performance to keep afloat.

At the time I was concerned enough about MOJs contracting systems that I considered speaking to their auditors, butI was concerned that if I did so the charities who I was connected with risked being disadvantaged in future bidding rounds.

HMG have produced a new “playbook” for people making outsourcing decisions, which tries to encourage more rigorous modelling of how much a service should cost and then run pilots, suggests ways to allocate risk between government and suppliers, and assess the merits of delivering a service in-house compared to outsourcing.

The problem is that the playbook doesn’t really address the central problems – some areas of Government business aren’t really suitable for outsourcing, and there is a massive lack of commercial expertise across the Senior Civil Service.

For MOJ there is no way of fixing this situation. No way of mending the problems, or sorting out the market failure.

Outsourcing criminal justice services doesn’t work, and the whole system should be brought back in house immediately.

The sad thing is that there are still some really good UK outscourcing companies who do better work for the clients and service users than their public sector equivalents. There is nothing special about being a civil servant that makes people good at dealing with people or managing complex business processed.

But too many parts of the state of been outsourced in a way that makes no sense for HMG and no sense for the outsourcer. As HMG has got stricter with outsourcers driving down profit it has forced outsourcing companies into riskier business areas to keep their margins healthy. This imbalance of risk and reward is infecting the whole industry and putting companies out of business.

Left wing critics have failed to come up with a workable critique of outsourcing beyond some rather tired stuff about evil capitalists. Internal civil service critiques of outsourcing are driven by the desire to build large personal “commands” and a suspicion of commercial management as not really being a gentlemanly pursuit.

But that doesn’t really matter when the advocates of outsourcing are headed by Chis Grayling who is doing a great job of trashing the UK outsourcing industry.

Are Pharmaceutical Companies really the baddies? How bad? And what should we do about it?

Big Pharmaceutical companies aren’t very popular. You may have spotted this.

Right now the firm in the spotlight is Vertex, who are announcing a tidy increase in profits, while the NHS squabbles to afford their new Cystic Fibrosis drug Orkambi.

Before I start giving the pharmaceutical industry a kicking lets start with a few words of praise for them.   The last decade has seen huge improvements in life expectancy around the world.   In some countries this is due to reductions of poverty, and better public health, but in developed countries like the UK a big bit of this improvement is due to drugs like Statins. 

OK. So having got the nice bit out of the way lets have the kicking.

The pharmaceutical industry is marked by high levels of market failure.   If you want an image to understand the scale of market failure watch the London Marathon or the Great North Run. Each set of coloured vest running for a healthcare charity represents the failure of the market to invest in the treatments that customers want.

Sometimes this is because the treatments that customers want aren’t available for technological reason, but often it is because market incentives drive drugs companies to invest in research into obesity and erectile dysfunction drugs aimed at affluent western consumers rather than cures for malaria in the developing world.

At this point I’m going to explain how the NHS deals with the cost of prescribed drugs. Trust me, it’s not as dull as it sounds.

The NHS is the biggest purchaser or drugs in the UK, and the costs are going up.   The NHS currently spends £18bn+ on drugs, a figure that has doubled since I left the service a few years ago.    Prescriptions are one of the few parts of the NHS which has co-payments, which raised just under £0.5bn last year.  

Because most people pay for their prescriptions there is a perception that perscription changes are a much bigger part of the drugs budget than they really are.  Largely this is because people who need lots of medicines don’t pay for them, and because lots of expensive prescribing takes place in hospitals.

The NHS has historically tried to balance a number of competing policy objectives:

  • Controlling cost
  • Encouraging R&D expenditure on new treatments
  • Ensuring patients get access to new treatments promptly

The tactics which the NHS use to control cost growth haven’t changed much since I ran a Primary Care Trust:

Increasing generic prescribing – encouraging Doctors, particularly GPs to switch from the branded version of a drug to it’s generic equivalent as it comes off patent.

To give an idea of the scale of the savings the NHS achieves through generic prescribing Atorvastatin, a widely-used statin, was developed in the 1980s (under the brand name Lipitor) and its UK patent expired in 2012, allowing generic competitors to enter the market. Consequently, NHS spend on Lipitor prescriptions in primary care fell from around £310.5 million in 2011 to £105.8 million in 2012 and to £3.3 million by 2014 as patients were switched to generic atorvastatin

Restricting access to very high cost drugs if they don’t pass a value for money test.   

This is often the most controversial part of reducing cost growth and is the reason for the current row about Orkambi.

When a new drug is proposed it first goes through a safety test, over seen by the EU Medicines Regulatory Agency, which was based in London until the Brexit vote led to it moving abroad.   Once it has been approved it is assessed by the National Institute for Clinical Excellence, to test whether it is better than existing treatments, and whether it is cost effective.  

When NICE makes a value for money assessment is looks at the difference in cost (the extra spend), and divides it by the difference in effect (the extra benefit). This is known as an incremental cost effectiveness ratio or ICER. This is then converted to a cost per Quality Adjusted Life Year (QALY). If the QALY score is less than £20k it gets funded. If it is over £30k it has no chance. Between £20k and £30k it is debatable. QALY are meant to level the playing field between drugs which extend life and drugs which improve the quality of life.

This is the over all process:

To add to the complexity if a drug meets the affordability criteria but would cost more than £20m per year in total this triggers a separate set of negotiations with the supplier, and there are separate rules which apply to drugs for very rare conditions which can go over £100k per year.

Once a drug has been approved it should be available across the NHS thus avoiding variations in drugs access which infuriate patients.

All of this is covered by an overarching deal between the NHS and the industry called the Pharmaceutical Price Regulation Scheme, which is meant to help the NHS manage the cost of new drugs, while protecting access and incentives to innovate

Too often the NHS has lacked leverage in his dealings with the Pharmaceutical industry.   

Part of the reason why they have so much leverage is that Pharmaceuticals are a big exporting industry, with overseas sales of over £28bn – we have a deficit on trade with the EU (which is why no deal Brexit is such a problem), but a big surplus with the rest of the world

But more than the economics of export the Industry can reach over the heads of the NHS and present it’s case directly to patients through the media and through lots of PR and spin.

Probably the most notorious example of this is the campaign for access to Herceptin.  Herceptin had previously been made available by the NHS for treatment in late stage breast cancer. In 2005 Roche put forward new evidence which claimed to show that it had potentially huge benefits in early stage cancer.

A group of campaigners came forward who argued that these benefits were so dramatic that Herceptin should be approved for this use without the normal process and regardless of cost considerations. The campaigners featured heavily on TV and in the Press, and the then Secretary of State Patricia Hewitt approved the prescribing of Herceptin out with the normal process due to political pressure.

It subsequently turned out that the campaign had been funded and organised by Roche, and that they had hired Porter Novelli, an expensive PR agency who had recruited the campaigners and written their script.

The whole campaign was faked, but it worked. The campaign won the Chartered Institute of Public Relations Excellence Award in 2006.

Herceptin is an extreme case, however Drugs companies use the media to sell the case for treatments all the time. All media outlets love a miracle cure story, and drugs companies PR departments find it easy to get the media to repeat their press releases without question.

It would be wrong to single out any one media outlet for criticism but the Daily Mail’s Health supplement is fucking dreadful. As a PCT Chief Executive I had to deal with patients with terminal illnesses who were convinced that a particular treatment would save their life or grant them more time with their family.

Two of the main ways in which drugs companies distort the debate in the popular media are to overstate the benefits of a drug or to underplay it’s cost

When over stating the benefits the easiest way to do so is to compare the average result of one treatment, with the high rate response for the preferred treatment, for example: “using current treatments most patients die within 6 months, but with the new treatments some patients live for up to 2 years”.

This is shifty stuff, but sill the most common way to misrepresent a drug is to distort the way the cost per life year is represented.

To explain how this is done lets imagine a drug which costs £10k per year, and which would extend the life of a patient by 1 year. This would be £10k per year and would meet the NICE threshold

But if the patient had to take the drug for 3 years in order to gain one year of life then the cost would be £30k per year, which would be at the upper limit for approval

And if the response rate for the drug was only 50% (i.e for 2 patients who took the drug only one benefits) then then 2 patients would have to take the drug in order to get one extra year of life. Which makes the cost £60k per year, way out of affordability for the NHS.

Because journalists don’t like these kinds of lengthy boring explanations it is easy for drugs companies to present misleading information about the cost of their treatments.

Before we stop being angry with drugs companies it is worth thinking about how Pharmaceutical companies spend their cash.

Only about 20% of Pharmaceutical company spend is R&D. The biggest cost is production, then marketing and sales.  It seems crazy that there is a need for so much spend on marketing and sales in the UK where there is effectively a monopoly purchaser

Drugs companies aren’t the only places were research takes place. Much of the primary scientific research takes place in universities and in  NHS Hospitals.   How much state funding goes in to subsidise the pharmaceutical industry is incredibly hard to calculate.

Direct NHS R&D spend is over £10bn, but there is lots of other work which goes on which isn’t funded from that budget, often small scale and local, but important none the less.  By contrast the UK pharmaceutical industry spends about £4bn+ on R&D

So given the levels of market failure I described above should the government intervene and cancel the patent on Orkambi?  Legally it can over-ride the patent and make Orkambit available generically, just like the statins I described above.   Liverpool University estimate that a genetic version of Orkami could be produced for £5000 per patient per year. 

There are very few examples of Governments acting like this in the public interest. 

The most wide scale example I can find from the UK was the Wilson government acquiring generic Tetracycline from Italy.  This cut the costs to the NHS, and made the drug widely available.  It also caused a whole generation to grow up with strange brown stains on their teeth (including me!)

The North of England Clinical Commissioning Groups did something similar last year when they went to the High Court to Novartis and Bayer over the availability of generic Avastin rather than the branded drug Lucentis for macular degeneration.

People might be annoyed by such a lengthy description of NHS drugs processes but in any healthcare system resources are finite, and efficiency in allocating these resources isn’t just an abstract managerial process, it has clinical and ethical dimensions. When you give resources to one group of patients you take them away from another.

I’m normally a staunch defender of the NHS as established by the Attlee Government, which kept the Pharmaceutical industry in the private sector. But this is an area due for a re-think. Given the scale of NHS spend on R and D and on purchasing drugs I would establish a state owned challenger company to develop and manufacture drugs for the NHS.

This would be a much more radical proposal for left wing politicians rather than complaining about using Spire to cut waiting lists or attacking GP contractor status.

Student Loans Swindle 2: Cash from chaos

A month ago I wrote about the weird world of Student Loans and how they are accounted for by the Government.


Today the Office of National Statistics published their review of Student Loans accounting, which makes some big changes to how the Government calculates the deficit (but not national debt)

In short an extra £12bn will be added to the deficit, increasing it from £40bn to £52bn.   After 8 years of austerity to discover that we have calculated the deficit wrong, and that a huge chunk of the deficit reduction was just accounting measures is a huge disappointment.  

Adding up all of the other wriggles and wheezes the Government has used to make the numbers look better my guess is that the actual deficit reduction was only about half the Governments claims.

Just think of all of the hardship caused for such a piss poor return.