Mutualising the NHS: A cautionary tale from history

By SMF Research Associate Arthur Downing

Without major structural reform, history suggests that mutualising the NHS is a bad idea.

The mutualisation of public services has been heralded as an innovative solution to the challenges facing the public sector. The theory goes like this: giving front line workers a stake in public services will boost staff moral, increase productivity, reduce unnecessary expenditure and allow organisations to tailor provision to local needs. Since 2010, 91 public sector mutuals have been established in a diverse range of areas. This week Francis Maude set his sights on the NHS, telling the Guardian that this was ‘the way of the future’. As part of the push Maude and Norman Lamb, the Liberal Democrat health minister, have written to all leaders of NHS trusts encouraging them to consider mutualisation. With conference season about to start this could give an indication of Tory health policy in 2015. Maude may have his eyes on the future, but the contemporary and historical evidence demonstrates that this is a bad idea.

Little hard evidence

At one level the policy is a jump into the unknown. The Government has lavished praise on existing public sector mutuals but there is little hard information on how they are performing. One of the intentions of the policy is to free organisations from extensive Government oversight. The Cabinet Office is proud of its record on publishing open access data but as it stands the only information available consists of a few short lists of organisations that have received assistance from the Mutual Support Programme.[1] Reports by the King’s Fund and the University of Southampton found that staff moral had improved, employees had more flexibility and that a there were higher levels of innovation and efficiency. Although in both instances the sample sizes were small and much of the evidence anecdotal. It would be unwise to rush through further changes without a thorough investigation into whether public service provision had been enhanced by mutualisation.

Like with every form of economic organisation, there are upsides and downsides to the mutual model. There is solid international evidence that workers in mutuals have higher levels of satisfaction and are more efficient. Yet there is a cost – mutuals are bad at raising capital. The workers are the owners and form the capital base of the firm. If a mutual wants to raise capital it has to turn to its members, or to banks and commercial investors.

A recent report by the Social Market Foundation identified problems in accessing capital as a major barrier to widespread mutualisation. In Spain health care mutuals were successful enterprises in the 1990s but by 2010 had receded into obscurity. The main problem: access to capital. The mutuals couldn’t invest in new sites and were too illiquid to bid for increasingly large contracts. The report by the King’s Fund argued that NHS mutuals should have access to funding on the same terms as Trusts and Foundation Trusts. Without this legislative change, healthcare mutuals won’t be able to partake in the long-term reorganisation that the NHS requires to meet future challenges.

Another unanswered question is what happens if a mutual goes bust – a major concern given the illiquidity problem. The same King’s Fund report called for the regulations governing insolvent trusts – the special administration regime – to be extended to mutuals. This may seem a technical point but it is of monumental importance. The 2012 Health and Social Care Act replaced a duty to provide a national health service with a duty to promote the provision of services through commissioning consortia. Last week Labour threw its support behind Clive Efford’s Private Members Bill that, amongst other things, restores the central duty on the Secretary of State to provide an NHS. The current special administration regime makes provision for rescuing failing trusts but it is clear that the Minister can deny funds. Mutuals are in an even more precarious position and the Department of Health is under no statutory obligation to step in if one fails. If the Government embarks on widespread mutualisation and the programme fails we could lose a whole host of NHS services for good.

Remaking past mistakes

It is important to remember what existed before the NHS and what it was formed in reaction to. Between 1911 and 1947 Britain had a National Health Insurance (NHI) system. On paper the scheme was elegant in construction. Participation was compulsory for manual labourers and anyone over the age of 16 earning under a threshold.[2] Employers paid contributions by purchasing a revenue stamp, costing 7p, from the post office. The employer then made a deduction of 4p from the employee’s weekly wage. Individuals earning above the threshold could also participate but they would pay the employers share as well as their own. Stamps were affixed to a national insurance card, which was presented to an ‘approved society’ of the individuals choosing – like our neo-Liberals today the Edwardian Liberals worshiped at the shrines of choice and competition. The society used these cards as proof of contributions and would dispense benefit when required. The benefits on offer were extremely meagre by modern standards. Members could claim sickness benefits if they fell ill and had access to free medical treatment from a designated general practitioner. The government reimbursed the societies every quarter and contributed 2p for every 9p of benefits distributed (reduces to 1p for every 5p in 1928).[3] The ‘approved societies’ were a combination trade unions, life insurance companies and ‘friendly societies’ – cooperative sickness insurance organisations that flourished in the 19th century. To qualify for approved status an organisation had to meet two conditions: the state side has to be entirely not-for-profit and under the control of members.[4] In other words, this was a national system operated through mutuals.

The theoretical elegance of the NHI scheme was only matched by its total failure. Self-governance was intended to give workers a stake in the scheme, which encourage monitoring, restraint and a sense of propriety. In theory this would prevent excessive claims and encourage efficiency. In reality self-governance amounted to little. In the large life insurance ‘approved societies’ meetings were extremely infrequent and the vast majority of members didn’t have a say in the way the society was operated.

A broader problem was that most approved societies did not have access to capital. In theory societies that performed well and accrued surplus funds could apply for the extension of new benefits, which would allow them to attract new members.[5] In practice Whitehall had complete control over the approved societies funds and capital was rarely forthcoming. Conservative valuations by the government actuary prevented the extension of benefits, especially in times of economic hardship. There is a contemporary lesson here. It is all very well central Government promising access to funds in the future but when the economy takes a downturn it is easy to renege, leaving cash strapped mutuals vulnerable to collapse.

Another cost was health inequality. Competition led to variation in the quality of approved societies. Choice was a chimera; an individual picked an approved society with incomplete information about the quality of the scheme. Through no fault of their own they might find that they didn’t have access to the same treatment as their next-door neighbour.Moreover because of financial pressures many of the smaller approved societies collapsed. Only those in affluent areas were able to offer a comprehensive list of benefits.

Private vs. state

Unison have called the mutualisation program a ‘Trojan horse for privatisation’, as spun-out services can subsequently be taken over by private firms. The historical record demonstrates that we should be concerned about the role that the private sector will play in mutualisation. Under the NHI scheme approved societies were able to offer state insured individuals a package of additional benefits.[6] As Beveridge noted, administering the state scheme gave these companies an important form of market entrance – quite literally, a foot in the door.[7] An agent of a life insurance company could make a home visit in an official NHI capacity but then undertake private business, thus reducing the administrative costs to the company.[8] Even the less commercialised friendly societies engaged in ‘cross-selling’ and ‘upselling’. In December 1912 the Ancient Order of Foresters had 610,772 purely voluntary members, 566,771 state members and 398,873 members paying into both schemes.[9] Over time the mixed mutual-private model was bad very for patients. Many of the approved societies opposed the extension of new benefits under the state scheme because it would undercut their business.

The central problem, something Beveridge realised in 1942, was that the whole scheme was exorbitantly expensive. It may be the case that a limited degree of mutualisation enhances efficiency in a particular corner of the NHS, but this does not prove that widespread mutualisation will be efficiency enhancing. It is important to think about the aggregate effects of fragmentation. Between 1911 and 1947 the NHI was operating through thousands of administrative units, over 7000 by the mid-1920s, which proved inefficient. At the local level medical services were very poorly integrated and it made little sense to pay so many people to administer the scheme when there were economies of scale in conglomeration. The Prudential had an army of thousands of agents who were paid to visit handful of homes.

The NHS was built in reaction to the NHI. Mutualisation had not worked; the scheme was costly, inefficient and unfair. When making decisions about the future of the NHS politicians must show a greater awareness of its history and learn the lessons of the past.

Arthur Downing is a Research Associate at the Social Market Foundation. He is a fellow of All Souls College Oxford, where he is completing a DPhil in economic history on cooperative sickness and health insurance funds around the English-speaking world between 1840 and 1930. He currently works as a Research Consultant at Lexington Communications.


[2] B. Harris, The Origins of the Welfare State (Basingstoke, 2004), p.163; H. Levy, National Health Insurance: A Critical Study, (Cambridge, 1944), p.34.

[3] See B. Gilbert, The Evolution of National Insurance in Great Britain: The Origins of the Welfare State (London, 1966), pp.354-55.

[4] Levy, National Health Insurance, p.7.

[5] Levy, National Health Insurance, p.12.

[6] PHJH Gosden, Self-help: Voluntary Associations in 19th Century Britain (New York, 1974), p.282.

[7] W. Beveridge, Social Insurance and allied services (London, 1942), p.32.

[8] Levy, National Health Insurance, pp.216-7.

[9] Directory of the Ancient Order of Foresters Friendly Society for 1913, p.658.


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