Long-term sustainability of the NHS: Options for systems and funding

On 18 April 2024, the House of Lords is due to debate the following motion:

Lord Patel (Crossbench) to move that this House takes note of the long-term sustainability of the NHS to be able to deliver comprehensive, timely and affordable health and social care for all, including options for systems of care and funding.

This briefing explores how the NHS is currently funded and the sustainability of that funding model. It also considers alternative health care systems and funding models used in other countries, such as social health insurance (used in several European countries, including France and Germany) and private health insurance (as in the US).

For more information on NHS performance, waiting times, staffing issues and current government policy on the NHS, see the following House of Lords Library briefings:

• ‘The 75th anniversary of the NHS: How is it doing?’, 23 November 2023
• ‘King’s Speech 2023: Health and social care’, 1 November 2023
• ‘NHS in England: Current performance and innovation’, 8 June 2023
• ‘Staff shortages in the NHS and social care sectors’, 9 December 2022

For discussion of recent debate on reform of the social care system, see the following House of Lords Library briefings:

• ‘Reforming adult social care: House of Lords committee report’, 28 September 2023
• ‘Future of adult social care’, 20 March 2023
• ‘Social care funding: Debate on the Economic Affairs Committee report’, 21 January 2021

1. NHS funding: The general taxation model

The NHS is predominantly funded from UK general taxation and national insurance contributions. Within the block grant allocated to each devolved nation (through the Barnett formula) each country is free to decide how much to spend on the NHS.^[1]

Countries such as Australia, Canada, New Zealand, Italy and Sweden also have taxation-based health care systems.^[2] However, most countries do not rely on a single source of health care funding; most have a combination of taxation, user charges or elements of private insurance. Although the NHS is generally described as being ‘free at the point of use’, patients are required to contribute to the cost of some services, such as prescriptions, dentistry and eyecare. Exemptions apply for some patients, including those aged under 16 or over 60, and those on some state benefits. The UK also has a private health care market. In 2021, it was estimated that about 11% of the UK population had private medical insurance.^[3]

In 1949/50, the first financial year after the NHS’s foundation, NHS expenditure was £447mn (3.5% of gross domestic product (GDP)).^[4] By 2019/20, the last financial year before the coronavirus pandemic, government expenditure on health services had reached £164bn (7.3% of GDP). Figure 1 shows the increase in health spending as a proportion of GDP over the post-war period. During the pandemic, healthcare spending peaked at 10.5% of GDP, but has since reduced to 8.4% in 2022/23.

Figure 1. UK government expenditure on health services (% GDP)

UK public spending on health care is comparable to other developed nations. Figure 2 shows the pre-pandemic health expenditure of Organisation for Economic Co-operation and Development (OECD) countries as a percentage of GDP in 2019. UK health expenditure was more than the OECD average, but lower than other countries with tax-based health care systems, such as Canada, Norway and Sweden.

Figure 2. Health expenditure by percentage of GDP, 2019

A 2017 study of different health care systems by the King’s Fund health think tank listed the following arguments for and against taxation as the main source of healthcare funding:^[5]

For taxation:

• It is generally considered to be equitable: where general taxation is drawn from the whole population, regardless of health status, income or occupation, it pools both financial and health risks. Exactly how equitable these models are depends on whether the wider tax system is progressive or regressive.
• General taxes are an efficient way of raising money, with low administration costs relative to the amount of money they raise.
• There are strong incentives in tax-funded models to control spending. This is because in these systems, the process by which the spending level is determined is a political one that forces governments to weigh trade-offs between health and other areas of public spend. The ability to control spending in this way brings with it both benefits and disadvantages.

Against taxation:

• As spending on health care tends to rise over time, health services can consume an increasing proportion of public spending. To pay for this, governments can either divert funds away from other areas of public spending or raise taxes, which can be unpopular, and particularly difficult during an economic downturn.
• Some argue that these decisions politicise the process and can make health budgets less predictable from year to year, although others see this as an advantage as it introduces a degree of accountability not present in other models.

In June 2023, the King’s Fund published a separate report on the performance of the NHS compared to the health systems of 17 other developed countries in the OECD.^[6] The report concluded:

• The NHS performs well in protecting people from some of the “catastrophic costs of falling ill”, though protection was “weaker for some services, such as dental care”. A relatively low share of the UK’s health budget is spent on administration.
• The NHS has “fewer key resources” than its peers, with below-average health spending per person. It has fewer doctors and nurses per person and less equipment, such as CT and MRI scanners and hospital beds.
• NHS health care outcomes are “middle of the pack” in terms of waiting lists for common procedures, such as knee, hip, and cataract operations. The NHS “performs noticeably less well” on outcomes such as survivable cancers, treatable mortality and life expectancy.

2. Social health insurance model

Several European countries, including France, Germany and the Netherlands, have a social health insurance (SHI) system.^[7] In SHI systems, members (normally employees) contribute a proportion of their salary, with contributions based on income, not on risk of illness. Typically, contributions are also made by employers. Contributions are often collected by independent insurers or ‘sickness funds’, which are often publicly run. There may be a single fund, or various funds covering different occupations or parts of the population.

In practice, there can be wide variations in how SHI systems work in different countries. For example, in France there is no choice of insurer and widespread use of user charges (also known as co-payments).^[8] In Germany, those on higher incomes can opt out of the SHI system entirely.

As SHI systems are often based on employment, countries operating this model must find ways to subsidise those not in employment. The King’s Fund stated that in France, this is achieved through general taxation and “‘sin taxes’ on alcohol and tobacco”. In Japan:

[…] employees of large firms are required to sign up to SHI; employees at smaller firms are given cover through the Japan Health Insurance Association; those who are not covered by either of these are covered by a government scheme.^[9]

The King’s Fund gave the following arguments for and against SHI:

For SHI:

• Ensuring equity and universal access based on clinical need is a principal objective of SHI systems, and a major benefit is that payment is not related to risk. Properly designed, SHI can provide comprehensive cover to all, in a similar way to tax-funded systems.
• Compared to private insurance, SHI is generally considered to be more efficient as it allows pooling of resources and risk across a group of people.
• Social insurance funds can be kept separate from other government-mandated taxes and charges, such as hypothecated tax models.^[10] They potentially give more transparency and provide increased certainty about funding levels for health in the medium term.
• Because SHI contributions are raised purely for health, beneficiaries may be more willing to contribute the rates needed to provide comprehensive coverage.

Against SHI:

• SHI schemes usually result in higher taxes on wages; employers and employees both contribute, leading some organisations to argue that this makes them less competitive in a global market when compared to those in countries that fund health care through general taxation.
• If there are many insurers and people can switch between them, administrative costs can be high.

3. Private health insurance model

In private health insurance (PHI) systems, individuals (or employers on their behalf) take out insurance from private organisations.^[11] The US has a predominantly PHI system. In some countries, such as Switzerland, PHI is compulsory. In the US, the 2010 Affordable Care Act (informally known as Obamacare) required individuals to maintain a minimum level of health insurance coverage or pay a tax penalty for non-compliance. In 2017, the tax was reduced to zero, effectively eliminating the penalty.^[12]

In PHI systems, policyholders make regular contributions and their employer may also make contributions. In theory, private insurers operate in a free, competitive market, offering consumers a choice between different benefits packages. Typically, PHI policies may not cover the full costs of health care and may require members to cover some of the costs. This is the case in the US, with insurance policies typically including co-payments (for example, the user may have to pay the first $30 towards the cost of a doctor’s visit) and deductibles (an amount the user must pay before the plan’s coverage begins, similar to an ‘excess’ in the terminology of UK insurance policies).^[13]

As with other health systems, most countries that have PHI as the dominant form of health care also rely on other sources of funding. For example, the US has two publicly funded programs: federally administered ‘Medicare’, which covers the elderly and some disabled people; and joint federal- and state-administered ‘Medicaid’, which covers those on low incomes.^[14]

In the US, the Affordable Care Act was introduced to address issues of high insurance costs and significant gaps in health care coverage. In 2010, approximately 48 million Americans aged under 65 (18% of the population) were estimated to have no health insurance.^[15] In 2023, the US Department of Health and Human Services reported that the figure had fallen to an “all-time low” of 7.7%.^[16]

The King’s Fund gave the following arguments for and against PHI:

For PHI:

• Proponents of private health insurance argue that it promotes choice for users, encourages competition and drives up standards of care. Competition can in theory also drive down premium prices between competing insurance companies; however, Switzerland and the US, which both use PHI as the primary source of financing, spend more on health than the UK.
• It is also often argued that private health insurance reduces the burden on public finances by taking some people out of the state system.

Against PHI:

• A pure (unregulated) PHI market is inequitable as it is based on risk selection. This means that insurers can deny cover (or charge very high premiums) to those who are deemed more likely to use health care services, such as those with pre-existing medical conditions or older people, leaving a proportion of the population uninsured (and therefore forced to pay for their own care).
• There are a variety of failures in health care insurance markets (such as asymmetric information and market power), so when private health insurance is used as a primary source of funding it tends to be heavily regulated.
• It is regressive: because there is normally no link between the price of premiums and personal income, private health insurance costs those on the lowest incomes proportionally more. As those on low incomes tend to have a higher need for health care, they are also more likely to have higher premiums, which may act as a further barrier to access.
• This model tends to incur high management and administrative costs due to the resource required to assess risk, set premiums, design benefit packages and assess claims.
• Employer-based PHI schemes can make employees with higher health risks less likely to move to new employers and less able to work as self-employed or in smaller firms, leading some to argue that it makes countries less competitive in a global market.

An OECD report in 2004 on the benefits and costs of PHI systems concluded:

In countries where PHI plays a prominent role, it can be credited with having injected resources into health systems, added to consumer choice, and helped make the systems more responsive. However, it has also given rise to considerable equity challenges in many cases and has added to health care expenditure (total, and in some cases, public) in most of those same countries.^[17]

4. Should the UK move to a different healthcare system?

4.1 Assessments of health care funding systems

In 2017, the House of Lords Committee on the Long-term Sustainability of the NHS published the report of its inquiry.^[18] Specifically on the funding model for the NHS, the committee stated:

The evidence to support the retention of general taxation as the principal method of funding the NHS was robust and consistent, leaving us in no doubt that this was the preferred approach for healthcare professionals, experts, parliamentarians and the public alike.^[19]

The committee cited a 2010 report by the OECD that compared the efficiency and value for money of different health care systems.^[20] This report concluded:

There is no health care system that performs systematically better in delivering cost-effective health care. It may thus be less the type of system that matters but rather how it is managed. Both market-based and more centralised command-and-control systems show strengths and weaknesses.^[21]

The committee considered the advantages and disadvantages of the UK moving to an alternative funding model. It said there was “general agreement that this would not be a viable solution for the UK”. It added that the committee was “not persuaded of any link between the way you choose to collect the money to fund a health service and performance”. The committee’s conclusion on the future funding system of the NHS emphasised that it was how revenue was used that was the important factor, rather than how it was generated. It said:

International evidence shows that a tax-funded, single payer model of paying for healthcare has substantial advantages in terms of universal coverage and overall efficiency. There was no evidence to suggest that alternative systems such as social insurance would deliver a more sustainable health service. Sustainability depends on the level of funding and, crucially, how those funds are used.^[22]

However, in response to the challenges faced by the NHS in recent years, some have suggested that changing the funding model is necessary to ensure its financial sustainability. In January 2023, Sajid Javid, the former health secretary in Boris Johnson’s government, published an article arguing that the “75-year-old model of the NHS is unsustainable”.^[23] He suggested that with other competing priorities for public spending and the “tax burden already at a 70-year high […] the long-term answer to increasing demand for healthcare cannot always simply be more and more money”. He believed the introduction of a “contributary principle” to the NHS (charges to see a GP, for example) would be “crucial” to help the NHS “ration its finite supply more effectively” and secure its long-term future.

In June 2023, Kristian Niemietz, head of political economy at the free-market think tank the Institute of Economic Affairs, described the NHS as the “ultimate sacred cow” in the UK’s public policy debate. However, he claimed that “alternatives to the NHS, especially social health insurance (SHI) systems, are now being discussed quite frequently in the British media”.^[24] Mr Niemietz said the “parameters for what is permissible to say in public [about the NHS] have shifted quite rapidly”. He welcomed this development and said the “new-found curiosity about alternatives could become part of a new normal”.

In contrast, Tim Gardner, senior policy fellow at the Health Foundation think tank, said in 2023 that debate about changing the NHS’s funding model was a “costly distraction” and that “there is no evidence voters want a radical change to the NHS model”.^[25] Gardner was responding to UK-wide polling data, published by Ipsos alongside the Health Foundation, which suggested that:

• 90% believe the NHS should be free at the point of delivery
• 89% think the NHS should provide a comprehensive service available to everyone
• 84% think the NHS should be funded primarily through taxation

The focus, Mr Gardner argued, should be on getting the current NHS model to “work better”. He suggested that the government needed to “produce a comprehensive plan, backed by sufficient investment” to get the NHS back on to a more sustainable footing.

The Nuffield Trust think tank has also argued that moving to a social insurance system would not necessarily improve the UK’s health care system. In 2022, as part of a series of ‘myth busting’ articles about the NHS, it claimed that:

Social insurance will not provide most of the benefits that its advocates hope for, and that’s because the NHS’s problems run deeper. But even if it was the answer, the path to getting there would be very difficult. It requires an expansion in capacity, investment in new systems and huge organisational change, including the privatisation of providers. This would be hugely disruptive, likely unpopular among staff and perhaps the public, and would take many years.^[26]

A January 2024 report from the Health Foundation that compared taxation-based and SHI systems, ‘Is the grass really greener? Comparing how social insurance and tax-funded systems raise revenue’, came to a similar conclusion. It stated:

No country performs well across all [healthcare] functions. […] Given the absence of strong evidence that any country’s funding system is superior to others, policymakers in the UK should focus on improving the current funding system for the NHS, rather than embarking on a wholesale switch to another funding model.

This was also the conclusion of a King’s Fund report in July 2023 that explored various “radical alternatives” to the NHS’s current funding model.^[27] The report considered the social health insurance model, private health insurance, expanded charging for NHS services, a ring-fenced tax for the NHS, and merging the NHS and social care. The report acknowledged that the definition of ‘radical’ was subjective and that many alternatives to the NHS’s current funding model had been “proposed, and rejected, for decades”.

The report concluded that, although each alternative had its strengths and weaknesses, a change of funding model “would not be advisable”. It gave four reasons for this conclusion:

• The cost of changing the system would be substantial, both in terms of the resources needed but also the opportunity cost.
• In the long term, there is no evidence that suggests any specific funding models routinely deliver a better health care system than any other. In fact, what tends to differentiate performance of health systems is the level of investment rather than the underlying model of funding.
• Self-pay and expanding charges would have ramifications for health inequalities for those unable to afford them and would also be unlikely to reduce pressure on the NHS.
• In the short term, there are significant challenges facing the NHS that these alternatives do not help to tackle. None of the alternatives proposed above would in and of themselves increase the capacity of the health care sector and so there would be no meaningful impact on improving access or reducing the backlogs of care more quickly.

In conclusion, the report stated that the NHS:

[…] needs to improve both health and care delivery and health outcomes. Doing this requires additional investment particularly on capital (buildings and equipment), fundamental changes to social care funding and provision, a comprehensive approach to improving the wider determinants of health and governments adopting a long-term perspective to avoid repeating the mistakes of the past on issues such as workforce planning. None of the ‘radical’ alternative models would be an immediate or targeted solution to the challenges facing the NHS. […] Tackling the challenges is better done through improving our current health care system rather than jumping ‘out of the frying pan and into the fire’.

4.2 Government and opposition views

The current government has said that it is committed to the founding principle of the NHS being free at the point of use. The prime minister, Rishi Sunak, stated in his Conservative Party conference speech in October 2023 that the government’s “commitment to the principle of an NHS free at the point of use is immovable”.^[28] However, he said that commitment to the NHS was not measured “by how much money you put in, but by how you reform it for the challenges ahead”.

In the spring budget on 6 March 2024, the chancellor, Jeremy Hunt, said that the NHS was “the biggest reason most of us are proud to be British”.^[29] The budget included £3.4bn to fund a “comprehensive NHS productivity plan” and an additional £2.5bn of day-to-day funding for the NHS in England in 2024/25 to “improve performance and reduce waiting times”.^[30]

The Labour Party has said that it is committed to the principle of the NHS being publicly funded, but it has also called for reform. Its website states:

Labour will always defend the founding principles of the NHS as a publicly funded public service, free at the point of use. But we need to be frank. The NHS is no longer the envy of the world. […] If we are to truly get the NHS back on its feet, we need to reform it. Yes, investment is needed, but pouring ever-increasing amounts of money into a system that isn’t working is wasteful in every sense.^[31]

In a speech given to the King’s Fund in April 2023, Shadow Health and Social Care Secretary Wes Streeting criticised the government’s handling of the NHS and suggested that wide-ranging reforms were necessary if NHS performance is to be improved.^[32] He also said a future Labour government would not be able to “pour more resources in” and that “reform will have to do more of the heavy lifting”. Elsewhere, Mr Streeting has also said that although privatisation of the NHS “could not be further” from his aims, he was open to the idea of private sector capacity being used to clear NHS backlogs.^[33]

5. Read more

• House of Commons Library, ‘The NHS workforce in England’, 29 February 2024
• House of Commons Library, ‘Funding for adult social care in England’, 21 February 2024
• House of Commons Library, ‘NHS key statistics: England’, 15 November 2023
• House of Commons Library, ‘The structure of the NHS in England’, 10 July 2023
• King’s Fund, ‘Comparing the NHS to the healthcare systems of other countries: Five charts’, 26 June 2023
• OECD, ‘Health at a glance 2023’, 2023; and ‘Private health insurance spending’, March 2022

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Cover image by StockSnap on Pixabay.