LSE study suggests centralisation in the NHS is lethal

January 22, 2008 3:23 PM

A host of problems are created by centralisation.  A few advantages to decentralisation were summarised in our report, Wasting Lives: A statistical analysis of NHS performance in European context since 1981:


    • "It is easier to vary decisions according to local circumstances.

    • It is easier to feed local information and the views of individual professionals and patients into the decision.

    • People will feel greater ownership of institutions that they are more closely connected to."

The huge costs of failing to vary decisions according to local circumstances are highlighted by a superb new study from the Centre for Economic Performance at the London School of Economics (via Tim Worstall at the Adam Smith Institute Blog).  From the abstract:

"We present evidence that stronger local labor markets significantly worsen hospital outcomes in terms of quality and productivity. A 10% increase in the outside wage is associated with a 4% to 8% increase in AMI death rates. We find that an important part of this effect operates through hospitals in high outside wage areas having to rely more on temporary “agency staff” as they are unable to increase (regulated) wages in order to attract permanent employees. By contrast, we find no systematic role for an effect of outside wages of performance when we run placebo experiments in 42 other service sectors (including nursing homes) where pay is unregulated."

What this is saying is that regulation - in the form of centralised pay bargaining - prevents health authorities in areas with higher average wages (and hence, usually a higher cost of living) paying more to get staff.  If health authorities cannot vary pay then the authorities responsible for areas where things like housing are vastly more expensive won't be able to get the staff they need.  They have to rely on agency staff whose pay can be varied.  This strategy has significant downsides in terms of cost and performance.  Its effect on healthcare quality is demonstrated by significantly lower survival rates after heart attacks for authorities in areas with higher average wages.


Lord Warner argued, in an interview with the Evening Standard today, that NHS Chief Executives in London needed better pay in order to attract staff.  He focuses just on one side of the equation, on trying to secure bigger pay package for staff in richer areas.  This isn't likely to deliver better value.  So long as the decisions over pay are still made centrally it will be hard to sell significant variations in wages to unions who need to serve all their members - most of whom won't be in London.  All we are likely to get is another big boost to Chief Executive pay across the board.


Hospitals are rarely poaching managers from the City.  The important thing isn't how salaries in the NHS compare to those in the private sector but how they compare to each other.  If London can't pay more than Birmingham despite London being a much more expensive city to live in then equal pay will mean London struggles to find attract doctors, nurses and managers who can choose to work for other health authorities in poorer areas.  We need decentralisation so that authorities in London can pay more to get the staff and authorities in Birmingham can pay less and get better value.


Pay bargaining at the centre means paying staff in poorer areas more than is necessary and not paying enough to get good staff in richer areas.  Local healthcare providers need to be able to set pay - the largest item in their budget - themselves.

A host of problems are created by centralisation.  A few advantages to decentralisation were summarised in our report, Wasting Lives: A statistical analysis of NHS performance in European context since 1981:


    • "It is easier to vary decisions according to local circumstances.

    • It is easier to feed local information and the views of individual professionals and patients into the decision.

    • People will feel greater ownership of institutions that they are more closely connected to."

The huge costs of failing to vary decisions according to local circumstances are highlighted by a superb new study from the Centre for Economic Performance at the London School of Economics (via Tim Worstall at the Adam Smith Institute Blog).  From the abstract:

"We present evidence that stronger local labor markets significantly worsen hospital outcomes in terms of quality and productivity. A 10% increase in the outside wage is associated with a 4% to 8% increase in AMI death rates. We find that an important part of this effect operates through hospitals in high outside wage areas having to rely more on temporary “agency staff” as they are unable to increase (regulated) wages in order to attract permanent employees. By contrast, we find no systematic role for an effect of outside wages of performance when we run placebo experiments in 42 other service sectors (including nursing homes) where pay is unregulated."

What this is saying is that regulation - in the form of centralised pay bargaining - prevents health authorities in areas with higher average wages (and hence, usually a higher cost of living) paying more to get staff.  If health authorities cannot vary pay then the authorities responsible for areas where things like housing are vastly more expensive won't be able to get the staff they need.  They have to rely on agency staff whose pay can be varied.  This strategy has significant downsides in terms of cost and performance.  Its effect on healthcare quality is demonstrated by significantly lower survival rates after heart attacks for authorities in areas with higher average wages.


Lord Warner argued, in an interview with the Evening Standard today, that NHS Chief Executives in London needed better pay in order to attract staff.  He focuses just on one side of the equation, on trying to secure bigger pay package for staff in richer areas.  This isn't likely to deliver better value.  So long as the decisions over pay are still made centrally it will be hard to sell significant variations in wages to unions who need to serve all their members - most of whom won't be in London.  All we are likely to get is another big boost to Chief Executive pay across the board.


Hospitals are rarely poaching managers from the City.  The important thing isn't how salaries in the NHS compare to those in the private sector but how they compare to each other.  If London can't pay more than Birmingham despite London being a much more expensive city to live in then equal pay will mean London struggles to find attract doctors, nurses and managers who can choose to work for other health authorities in poorer areas.  We need decentralisation so that authorities in London can pay more to get the staff and authorities in Birmingham can pay less and get better value.


Pay bargaining at the centre means paying staff in poorer areas more than is necessary and not paying enough to get good staff in richer areas.  Local healthcare providers need to be able to set pay - the largest item in their budget - themselves.

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