Economically speaking is a series of blog posts which draw on basic economic principles to understand the challenges facing the NHS. Written by Paul Healy, senior economics adviser at the NHS Confederation, this inaugural post explores the principle of demand.
demand /dɪˈmɑːnd/ n. the amount of a good or service a consumer is willing and able to purchase based on a number of factors.
Demand can be a difficult concept in health markets. This is because people do not usually want to consume healthcare; instead, what they really want is good health. Consumers will therefore choose health goods and services based on their ability to improve their health. Generally, this could include more than medical care and cover healthy food, gym memberships, and relaxation breaks, which might all contribute to staying healthy.
Traditional economics uses demand analysis to forecast how consumers in a market will respond to changes to prices, suggesting a downward slope where a decrease in price leads to an increase in demand. This would seem to apply to the consumption of the non-medical goods described above, which you would expect to increase in popularity were they more cheaply available.
As a public market, the consumption of NHS services is more complicated, where policymakers instead look to predict healthcare use and may attempt to modify it through direct intervention, such as taxes on smoking or subsidies on vaccinations.
Complicating matters further is the fact consumers of NHS services do not directly purchase them; rather, a third-party payer does so on their behalf. These are the commissioners, specifically clinical commissioning groups (CCGs) and NHS England, which in theory are set up to respond to the determinants of demands, such as changes to income or costs.
Many commissioners, though, find it hard to do this because it is not generally accepted that changes in their income should be reflected in the volume of services they purchase. For example, CCG allocations increased by 3.88 per cent between 2012 and 2015, yet emergency admissions to hospitals increased by 5.24 per cent during the same period. Furthermore, commissioners commonly encounter public opposition to any attempts to put limits on care, with recent examples including hearing aids and surgery.
As such, universal healthcare, combined with strong public scrutiny, obliges commissioners in the NHS to continue to fund relentless increases in demand. This would imply a lack of responsiveness at local level which reflects the inherent nature of wants for people in a service that is free at the point of use. In economics, this is described as ‘inelastic demand’, whereby a change in income prompts a smaller change in demand.
Interestingly, healthcare demand is more responsive at national level, with increases in GDP tending to cause higher health spending. This would suggest that healthcare is regarded as a luxury good at national level, rather than locally where it is seen more as a necessity.
All of this is significant because the ability to influence demand is a crucial component of the Five Year Forward View. That vision laid out the case for a more activist public health agenda, which should, in theory, shift the behaviour of consumers so that they rely less on medical care to obtain the utility they really want from good health. There is clear evidence for this in isolation, but it is yet to be seen what can be achieved at scale with the right investment.
While progress made in developing new care models is encouraging in this regard, cuts to the public health grant risk undermining the attempt to stem demand through an upgrade in prevention services.
Serious questions therefore remain as to whether the NHS can turn the curve on demand, which is why the focus of many policymakers is mostly on funding and efficiency. Funding has, at least for now, been set for the next five years, which leaves little room beyond improving productivity. This turns the attention from demand to supply, which will be featured in the next post.
Paul Healy is the senior policy adviser on economics and regulation at the NHS Confederation. Follow him and the organisation on Twitter @NHSConfed_PaulH @nhsconfed
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