Community care and the birth of the internal market

Today’s discussions on the crisis in social care – the heavily privatised provision of home care and care homes for older people and for people with serious and long-term mental health problems, learning difficulties and physical disability – seldom make any reference to the fact that many of people receiving these services used to be provided for by the NHS.

Thousands of long-stay specialist beds for older patients (geriatric beds) provided care for patients free at point of use: all of these have since closed, to be replaced by largely private sector provision of home care services and a mix of for-profit and non-profit private provision of nursing home care: this was the biggest area of privatisation in the NHS.

In 1987 the NHS had 127,616 acute hospital beds (handling emergency and elective care) and another 52,273 geriatric beds, giving a “general and acute” beds total of 180,889. 20 years later geriatric bed numbers had been cut by over 60% and acute beds by 20%, to give a total of 122,374. Since 2010 the category of “geriatric beds” has disappeared and the total of general and acute beds at the last count has fallen to 101,598 – a reduction of 44% in 32 years.

The Thatcher government, tearing up the “consensus” policies of much of the first 30 years of the NHS, began to shift the argument in 1981 with the publication of a White Paper Growing Older (DHSS 1981) and a consultative document Care in the Community (DHSS 1981), both of which centred on the drive to transfer patients and services out from hospital settings into “the community.”

The consultative document suggested that funds for community-based services would depend upon the sale of surplus land and buildings. These discussions took place under a growing cloud of well-founded suspicion that the NHS was looking to community care as a smokescreen to cover its abdication from responsibility for a growing area of care for the frail elderly and people with chronic mental illness.

Guidelines ignored

The guidelines for provision of beds for the elderly drawn up by the DHSS in 1976 had been massively and systematically ignored by cash-strapped Regional and District health authorities. By 1984 a survey by Shadow Health minister Michael Meacher revealed that not one region in England was planning to meet the targets laid down for in-patients or day hospital places. Instead, thousands of beds for the elderly had closed.

Despite a demographic “explosion” which was creating a sharp increase in numbers of elderly people in the vulnerable 75-plus age group, NHS plans across the country were looking to reduce bed numbers to an average of 25% below the 1976 guideline provision – with an even bigger (50%) shortfall in the provision of day hospital places.

While the closures of geriatric beds and the shortfall in care for the elderly grabbed headlines, behind the scenes the biggest shift of policy in care of the elderly had gone through with little discussion in 1980.

The Social Security Act, endorsing a policy which began to be applied in 1979, gave DHSS offices the discretion to meet the costs of residential or nursing home care for elderly patients from the social security budget. At first only a trickle of patients from NHS hospitals were to receive care paid for in this way: but this was soon to increase to a flood.

Growing numbers of health authority and hospital chiefs spotted that this was the ideal means to shift the bill for caring for an expensive group of patients from their cash-limited NHS budgets onto social security: and they followed this by closing down the vacated NHS geriatric beds.

Business entrepreneurs with an eye to a profitable investment saw that private nursing and residential homes offered an attractive proposition; numbers of homes and places rocketed during the 1980s (nursing home places increased from 18,000 in 1982 to 150,000 in 1994: private residential home places expanded from 44,000 in 1982 to 164,000 in 1994), while NHS provision was rapidly reduced.

The procedure under the 1980 Act was made even speedier by a 1982 amendment to the Social Security Act.  Until then Social Security officials had only been empowered to make top-up allowances to the board and lodging allowance to cover residential or nursing home fees: the new system made this an entitlement.

Rapid privatisation

The process that ensued was one of rapid, unannounced and almost unchallenged privatisation. For the frail elderly, the concept of care free at the point of use and funded from taxation was rapidly disappearing.

More than half of the elderly people in residential homes were paying their own fees. Many of those who moved into the dwindling number of council-run residential homes (which almost halved in number from 116,000 to 69,000 places over the same period) were obliged to pay for the privilege: 36% of the costs were being “clawed back” from residents through means-testing – paying charges totalling around £1 billion a year in the mid-1980s, eight times the annual revenue from prescription charges (Lister 1998:76).

But it was nursing homes that were set to become the biggest area of business growth. In 1979 it cost the DHSS £10m to finance 11,000 clients in nursing homes. By 1993, 281,000 people were receiving state-funded care in private homes, at a cost of £2.575 billion.

By the end of 1986 the Audit Commission was drawing attention to the scale of this spending, which was running out of control. Secretary of State Norman Fowler called in Sainsbury managing director Roy Griffiths to conduct an inquiry.

The resultant 1988 “Griffiths Report” (Community Care; Agenda for Action) proposed the transfer of responsibility for continuing care of the elderly from the NHS (where it was still provided free of charge at time of use) to local government (where it would be subject to means-tested charges). It amounted to the consolidation of privatisation and means-testing, with an end to the direct use of social security funding.

Response to Griffiths

A London Health Emergency (LHE) pamphlet (Community Care: Agenda for Disaster) responding to the report in September 1988 warned that

“We can hear the till bells ringing and the knife sharpening,” arguing that imposition of means-testing (and thus cutting NHS expenditure at the price of increased charges on individuals, their savings and property assets) was the main driving force behind Griffiths’ proposals, which were was quite explicit, arguing that: “Many of the elderly have higher incomes and levels of savings than in the past … This growth of individually held resources could provide a contribution to meeting community care needs.” (6.61)

As if to underline the financial agenda which informed his whole approach to the community care issue, Griffiths had little of substance to say about mental health services, which were to be left under the lead control of the NHS. It is a painful fact not lost on Griffiths that while many pensioners have savings and property assets which could be used to pay their own way, few psychiatric patients have sufficient wealth to make a similar approach worthwhile.

The Griffiths proposals implied even more wholesale privatisation, as they aimed to subject every aspect of community care services – whether residential or domiciliary – to “competitive tenders or other means of testing the market”. They would also confine social services departments to the role of “purchaser” of continuing care.

80% of the government money flowing to social services had to be spent in the “independent” (private or voluntary) sector. There were measures to deter councils from providing their own residential care services for the elderly.

Strangely enough, however, these policies, commissioned and published by a government with a track record of attacking local authorities, had been enthusiastically greeted by many Labour-led councils and chairs of social services. They seemed oblivious to the perils of what would later be described (in a rare political insight by shadow health spokesperson David Blunkett) as a “poisoned chalice”, which would involve Labour councils in means-testing pensioners and forcing many of them to sell their houses to pay for care in profit-seeking private homes.

The clue was in the fact that Thatcher, no fan of local authorities, had been persuaded to agree to this switch, recognising that it would bring a substantial reduction in government spending, and leave Labour councils taking the blame for failing services.

Nonetheless a bizarre local government pressure group called “Griffiths Now” (dubbed “Turkeys for Christmas” by LHE) joined forces to lobby for the reforms to be introduced sooner! Shadow Health Secretary Robin Cook also raised questions in the Commons pressing for swift implementation of the Griffiths proposals.

Few people in health or local government had followed the issue closely enough to recognise the danger. The policy was widely presented in the press (notably the Guardian) as a progressive package of reforms. LHE, which openly criticised the councils’ campaign, and which spoke at meetings of health workers and pensioners warning of the implications of the Griffiths reforms, came under pressure for its hard-line of outright opposition to every part of the package, and a number of councils cut their funding to LHE.

The government response to the Griffiths Report came in July 1989 with the publication of the White Paper Caring for People. Most of the Griffiths proposals were then incorporated into the National Health Service and Community Care Bill at the end of 1989, and Labour’s already tepid opposition to the marketisation of health and community care was further defused by its acceptance of half of the new legislation.

Kenneth Clarke described the proposals in the Bill as “80% Griffiths”. The missing 20% was significant. Dropped were Griffiths’ proposals for a separate minister for community care, and for the money transferred from social security to local government budgets to help pay for placements to be “ring-fenced” to ensure transparency and prevent it being used for other purposes. Also gone was Griffiths’ call for additional cash for community care.

However, the government recognised the potential disruption that could be caused if the reforms were introduced in 1991, alongside the new internal market proposals set out in the remainder of the Bill. So although the legislation was to be pushed through Parliament in 1990, the date for implementation was pushed back to 1993, meaning that the first new means-tested charges would be imposed comfortably after the next election.

White Papers

In January 1989 the White Paper, Working for Patients was launched with a lavish £1.25m nationwide press and TV extravaganza, including a scary video featuring Margaret Thatcher made clear the government was pressing forward with plans to “reform” the NHS.

Swiftly renamed “Working for Peanuts” by staff and “Working for Profits” by campaigners, the new plan embodied elements of many of the nostrums put forward by backwoodsmen and think tanks, but relied heavily on the concept of an “internal market” which had been advocated in a 1985 paper by an influential figure in American health care, Alain Enthoven.

Central to Enthoven’s approach was the allocation to health authorities of budgets calculated on a per capita basis: the HAs would then be free to buy services for local residents – either from each other, or from the private sector: his model was the US Health Maintenance Organisation, a device to regulate the ruinously expensive private healthcare sector which appeared to succeed in that objective for a few years in the mid-1990s (Ranade 1997).

Indeed Enthoven was one of the many economists, politicians and academics seeking ways of “managing” the chaotic and ruinously expensive private market in health care in the USA. His proposals aimed to restrict the costs of private medical insurance – and therefore reduce premium payments for individuals and for corporations – through the introduction of “managed care”, offering a restricted choice in the form of a defined range of funded treatments from a restricted range of “preferred providers” with whom specific deals would be done (Enthoven 1978).

Indeed Enthoven later went further, and argued in 2002 that excessive market freedom in the hands of health service users could undermine the market tools in the hands of the insurance companies, who would use their power to purchase in bulk as a means to hold down prices, arguing that free choice of provider destroys the bargaining power of insurers.

Internal market

The Thatcher proposals stopped well short of the root and branch “privatisation” or attack on the essence of the NHS that some had feared; but it did begin to remodel the NHS itself, dividing it into purchasers and providers, in an “internal market”.

For secondary care the main purchasers would be District Health Authorities, with funding allocated on a complex formula to take account of the age profile and social circumstances of their population.

Health authorities themselves would be drastically reshaped to look more like businesses: numbers of HA members would be cut from an average 18 to just 11 – but this reduced number would include five “executive members” (NHS managers, who had not previously had formal positions on health authorities). Each HA would have a chair appointed by the Secretary of State, and paid £20,000 a year for part-time involvement, and five “non-executive” members, paid £5,000 a year, also selected by ministers.

Through these payments the government’s control over the network of quangos through the power of patronage was strengthened.

A second type of purchasers would be GPs: bigger practices would be urged to take responsibility for cash-limited budgets, from which they would buy non-emergency hospital treatment for their patients – from local NHS hospitals or if they chose, from the private sector. GP budget-holders were swiftly renamed as “Fundholders” to avoid concerns that their budgets would run out.

The “providers” – the hospitals and community services – would initially be separately managed in an arm’s length relationship with the health authorities, but they would increasingly be encouraged to “opt-out” of health authority control as “self-governing” hospitals (later renamed as “NHS Trusts” in an attempt to overcome complaints that they were effectively “opting out of the NHS”).

Hospitals would be obliged to compete against each other for contracts from health authorities and GP Fundholders: the claim was that in this way money would “follow the patient”, rewarding the hospitals which best succeeded in meeting local requirements, with an all-round extension of “choice” and a downward pressure on costs.

Competition in the NHS

The notion of competition was not popular in the NHS. Many hospitals were still smarting and showing the scars of the “competitive tendering” of ancillary services, in which the lowest-priced tender had almost always been taken.

There were legitimate fears that, as with the tendering exercise, the “competition” would make only ritual nods in the direction of quality of care, and overwhelmingly centre on the issue of price: it would also lead to a further round of cost-cutting, which in turn, with labour costs still representing 70% of NHS spending, implied a fresh attack on staffing levels, pay and conditions.

Competition also brings losers as well as winners. Less-favoured hospitals which lost out to rivals for major contracts would also lose contract revenue. Those determined to steal away contract income from rival hospitals might decide to concentrate on a few, potentially lucrative services, at the expense of closing others.

With health authorities already beginning to run down their provision of elderly care and mental health beds, it did not take a genius to work out the likely areas that were likely to be scaled down.

Critics of the proposals asked whether it was purely by coincidence that the new system was to establish a comprehensive apparatus for pricing and billing for individual episodes of treatment – that that this same apparatus could be subsequently used by a future government to impose means-tested charges for care, in a possible move towards an insurance-based, privatised service.

GP fundholding

The proposal of GP Fundholding also brought in cash limits on primary care services for the first time. While opponents of the scheme asked what would happen when a fundholding practice ran out of money, a handful of GPs were lured by the lavish cash incentives, the chance to break away from the narrow confines of services dictated by their local health authority, the opportunity to negotiate preferential deals for their patients to secure more rapid treatment at selected hospitals (opening up a two-tier service within the NHS), and in some cases the possibility of buying services from the private sector.

Another attraction for the most grasping GPs was that they would be able to retain within the practice any surplus left over from each year’s budget.

One fundamental problem critics found with the introduction of fundholding was that it created a new uncertainty in the patient-doctor relationship. No longer could a patient be certain that decisions were being taken solely in his/her interests: now the financial situation of the practice, even the personal financial gain of the GP, could be seen as a possible factor underlying a decision.

The vast assets of NHS land, buildings and equipment would increasingly be “owned” by the Trust Boards, which would have the power to sell off surplus assets. There was a suggestion that self-governing hospitals would have the freedom to borrow money from the government or from the private sector – this proved to be one of the most misleading promises, as Trusts found themselves constrained from day one by rigid cash limits.

To make matters worse, Trusts were required to pay interest (“capital charges”) on half of the book value of their assets. This served primarily as an incentive to push Trusts into selling off spare property assets in order to escape capital charges.

Other promised “freedoms” for Trusts included the right to expand private wings and numbers of pay-beds, and the right to decide “local” pay and conditions for Trust employees – tearing up the long-established Whitley Council system of national-level agreements underpinning all grades of staff.

In return, Trusts were to be obliged only to balance their books and show a return on assets of 6% each year: any retained surpluses could be ploughed back into services. But of course, any losses would also be the sole responsibility of the Trust, and the reforms carried the underlying threat that a failing Trust could go bankrupt. Ministers insisted from early on that they would not bail out Trusts which failed financially.

The Thatcher government was not one to hold back for fear of public opinion, and the polls showing almost 75% of voters and more than half of all Tory voters to be opposed to the reforms did not prevent the proposals being pushed through Parliament as the NHS and Community Care Bill.

Even as Thatcher herself, paying the price for the mass rejection of her Poll Tax policy, was ousted from office and replaced by John Major, the legislation was pushed through. The first NHS Trusts began operations in April 1991 – with a massive package of redundancies at Guy’s Hospital – and the unstable years of the internal market began.

Next in this series: Enter PFI and private clinical providers

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