The English, Scottish and Welsh National Health Service (NHS) White Papers published by the government in December 1997 and January 1998, have changed the tone of NHS policy. Co-operation is to replace competition; there is to be a statutory requirement to provide good quality health care; and performance benchmarking is expected to succeed where market forces failed in producing efficiency gains. The consultation paper ‘Fit for the future’ published by the Department of Health and Social Services in May 1998 implies that the same changes will apply in Northern Ireland too. How far the practical operation of the NHS is altered by the White Papers’ proposals remains to be seen, but two changes that clearly will occur, and which are the focus of this paper, are:

1. the abolition of fundholding by individual practices of general medical practitioners (GPs) and their replacement by various forms of collective GP involvement in commissioning;

2. the inclusion for the first time within the cash limit applied to most NHS spending, of all of the cost of medicines prescribed by GPs. Hitherto, although the prescribing expenditure of fundholding GPs had been brought within the overall NHS cash limit, the prescribing of non-fundholders had remained non-cash limited.

The aim of the first of these measures appears mainly to be to avoid a ‘two-tier NHS’, where the patients of fundholding GPs may have been able to obtain referrals for specialist diagnosis and treatment more rapidly than could the patients of non-fundholders. A secondary aim is to contribute to cutting bureaucracy and hence costs, by reducing the number of parties negotiating with health care service providers and being invoiced by them. GP fundholding has spread widely, so that by 1997/98 over half of the UK population was registered with fundholding GPs. Abolition of this scheme from 1 April 1999 (but a year later in Northern Ireland) is likely to have effects beyond those apparently sought by the government, however.

In particular, it will weaken the incentives on ex-fundholding GPs to restrain their prescribing costs and those non-prescribing costs that were included in their fundholder budgets. At the same time, as will be argued in section 5 of this paper, it is currently unclear whether there will be a significant offsetting strengthening of the incentives on non-fundholding GPs (i.e. all GPs once the new policies are in operation) to restrain their total expenditures. Thus a pre- and post-White Papers comparison implies that the incentives on GPs to control expenditure will weaken in total. It remains to be seen whether that weakening will be significant.

The extension of the NHS cash limit to encompass the total Family Health Services (FHS) medicines bill, i.e. including for the first time the cost of medicines prescribed for NHS patients by non-fundholding GPs, may be intended to serve two main purposes. Firstly, it may be expected by the Treasury to tighten its control over NHS costs by bringing a further six per cent of total NHS expenditure under the (supposedly) fixed annual cash limit. (In 1997/98, in England, non-fundholding GPs’ prescribing cost £1.9 billion and fundholding GPs’ £2.2 billion. These sums equate respectively to just under and just over six per cent of total NHS expenditure.) Secondly, extending the cash limit takes away one possible distortion of rational clinical choices, by removing the incentive for non-fundholding GPs to prescribe medicines for their patients (for which expenditure is not cash limited) rather than refer them to specialist hospital or community health care services (for which expenditure is cash limited). It is unclear, though, whether this potential distortion to treatment choices has been significant in practice.

In this paper, I shall first describe the way in which NHS spending has been controlled until, and including, the 1998/99 financial year. In that context I shall then go on to assess the significance of the changes being brought by the Labour government’s recent NHS White Papers. The focus will be on how incentives have changed and will change for those who in practice make most of the expenditure-driving decisions within the health service, namely the doctors. Because it is GP prescribing expenditure which is subject to the change in cash limit status, it is prescribing expenditure which is the main focus of the discussion in this paper.

Given the difficulty of keeping exactly to budgeted expenditure when much demand for health care not only requires immediate satisfaction but also cannot be forecast with 100 per cent accuracy, the result of the White Papers’ changes may perversely be a progressive and significant weakening of control over total NHS spending. Many might see such an outcome as a good thing, meaning more money for the NHS, albeit at the expense of a greater burden on the taxpayer (either now or, if initially funded by increased government borrowing, later). However, unplanned NHS expenditure growth also has negative implications for the government’s macroeconomic policies and for achieving its desired balance of public spending priorities. Although a small percentage overspend on the NHS might appear to be insignificant in terms of the government’s attempts to direct the overall economy (e.g. a one per cent overspend on the NHS in England would equate to a £350 million worsening of the Public Sector Borrowing Requirement (PSBR)), it would become more threatening to macroeconomic stability if it were perceived as symptomatic of a lack of government will and/or ability to control public expenditure at all. Furthermore, overspending in the NHS would represent a divergence from the government’s planned priorities as between health and other public expenditure programmes (social security, education, defence, and so on).

From a narrow health service viewpoint, any unplanned additional expenditure may not have gone where the NHS would, ex ante, most have liked any extra money to have been spent. The government may well respond to any overspending by seeking offsetting savings elsewhere within the NHS in a subsequent year.