Episode Twenty-Two: The Big NHS Problem No One Talks About

Following on from a post about Warren Buffett, it seems appropriate to carry on with the theme and talk about capital allocation, this time in the public sector. We believe the British state is a sort of anti-Buffett, a uniquely terrible capital allocator blessed with an extraordinary record of failure over many decades and many different governments. As underinvestment and horrible capital allocation once destroyed the railway network in the days of BR, so they are now crippling the NHS. We believe these issues are largely responsible for the NHS’s relatively poor outcomes compared to most other developed-world healthcare systems.

In the press, it is very common to blame the NHS’s malaise on a surplus of administrative staff and a deficit of clinical staff. At least half of this is clearly nonsense. The NHS has far fewer than managers than virtually any other comparable large organization, while numbers of dedicated administrative staff have fallen dramatically since 2010. The real problem is underinvestment and capital misallocation.

While these data on the per capita numbers of CT and MRI scanners are a little old - from 2014 - they confirm the overall picture of the above graph, and provide further evidence that the NHS has a huge underinvestment problem.

While it is perhaps unsurprising that the UK substantially lags behind the US (a much richer country) and Germany (also richer, and they really love machines) on this metric, it’s really quite something that it trails both Spain and Ireland (poorer countries). And Greece! The true figures for the UK may be even worse than the graph implies, since many trusts are still operating old and antiquated scanners that cannot be updated with the latest software.

A few other anecdotal observations support the general picture of long-term under-investment in new equipment. Wireless fetal heart rate monitors, which enable women to move around and keep active during labour while the midwife continually monitors the baby, are slowly being rolled out across trusts, but coverage is still extremely patchy. The MyoPro orthotic, a revolutionary technology that restores extraordinary levels of upper-arm functioning to stroke survivors and victims of major trauma, remains unavailable. Post-natal maternity wards often lack piped oxygen.

All this runs alongside old, tired buildings with poor layouts that need either demolition and a rebuild, or extensive maintenance to keep them up to date. The high-risk maintenance backlog alone stands at £1.1 billion and grew by 139% from 2014-2019, while the lower-priority maintenance backlog is around the £6-7 billion mark.

Most worryingly, though, the problem seems to be getting worse. Ever since 2014, the Treasury has permitted the Department of Health to transfer money out of the capital budget to meet routine spending demands. From 2014-2019 at least £4.3 billion of planned capex disappeared in this manner, a figure that does not include underspends of the remaining capital budget in various years (if, like us, you thought the one useful thing the Treasury does is stop this kind of thing, perhaps it’s time to reconsider).

All of this should bring some realism to modern-day discourse about what can realistically be expected from NHS reform. If the NHS is privatized, in full or in part, we won’t really save any money as a nation: healthcare spending as a percentage of GDP will remain stable or - more plausibly - increase. Old people are expensive and healthcare is a superior good with high income elasticity.

There are, however, some sound theoretical and empirical reasons to expect that a more decentralized system with more market-like incentives should deliver much better value for money, higher capex, more R&D, and vastly greater investments in modern software and hardware. As anyone who invests in sectors like biotech or companies like Tesla will know, capital markets generally take the long-term view. It is governments, bound by the chains of electoral cycles, that are chronically short-termist and often unable to make investments today with long-term payoffs for the decades to come. For some reason, it is the British state that, of all modern Western nations, seems to perform the worst in this regard.