Shall we cap profits in health care?

As the general election campaign is limping from one damp squib to another, Labour came up with an idea on the NHS. Yesterday Ed Miliband made a commitment that all profits from health care contracts with private providers should be capped at 5 per cent. Any profits above that threshold will be seized by the government and ploughed back into the NHS.

The suggestion to cap profits resonates with many people's gut feelings that health care provision should not be a matter for capitalist profit. Health, so the reasoning goes, is not up for sale.

The principle is a well respected one and echoes fundamental reservations about mixing up health and capitalism. However, at closer inspection, it seems to rest on confusing two different dimensions of health care provision. The first dimension is the relationship between doctor and patient. Whatever goes on between patient and doctor is regulated by codes of medical practice and national guidelines. Profits have never played a role in this relationship despite GPs being private enterprises since the foundation of the NHS in 1946. And neither should they.

The second dimension is the health care market grouped around the first domain, ranging from the supply of protective gloves to syringes and capital investment into NHS hospitals. To wish away the market element in the supply of the health economy is like legislating for sunshine on Tuesdays.

Labour's proposal willfully confuses the two dimensions, the doctor patient relationship and the health care economy around it. As a former Labour health minister noted today, Ed Miliband's NHS policy amounts to little more than bluster.

So, what do other countries do about profits in the health care economy? The issue has been intensely debated during the introduction of Obamacare in the US and the lead of the implementation team (no other than Larry Summers) decided against a profit cap. Why? He argued that profit caps eliminate the (only) positive effect private providers bring to the health economy: their ability to look for savings.

Private providers have an incentive to seek out lower prices for comparable services or products because they can pocket the difference (the profit). If profits are capped, that incentive does not exist and prices will inevitably rise. This can be disastrous for a tax funded service like the NHS or one like Obamacare, since without the pressure of providers to identify cheaper options prices for the buyer (the NHS) will increase. In other words, eliminating the market element in private provision leads to higher costs for tax payers.

Miliband claims he is an ideas man. Looks like precious little thinking has gone into his last policy.