How health care is funded

The NHS is experiencing the longest and most severe slowdown in funding in its history. This has raised questions about the sustainability of its funding model.

The way that health care is funded varies between different countries. Here we explain the main models used to finance health care: taxation, private health insurance and social health insurance. We outline how each model works in its purest form, while recognising that most countries typically pay for health care using a combination of methods.

We also cover user charges. Although no European or OECD (Organisation for Economic Co-operation and Development) country relies on user charges as a primary source of health care funding, all countries incorporate at least some element of user charging into the funding mix.

We do not consider how social care is funded; in England, health and social care are funded separately, while the definition of social care varies between countries, making comparisons difficult.

How is the NHS in England currently funded?

The NHS is funded mainly through general taxation supplemented by National Insurance contributions.

While the NHS is generally described as being ‘free at the point of use’, patients have been required to contribute towards the cost of some services (eg, prescriptions and dental treatment) since 1951. Exemption arrangements are in place that cover many patients, including those aged under 16 or 60 and over, as well as recipients of specific state benefits. The exemptions in place resulted in 90 per cent of all prescription items in England being dispensed free of charge last year (Health and Social Care Information Centre 2016).

Health Caere

The relative contribution from each of these sources of finance – general taxation, National Insurance and user charges – has fluctuated over the years (see Commission on the Future of Health and Social Care in England 2014b). For example, the proportion of income from user charges, from a high of 5 per cent in 1960 remained at 1.2 per cent between 2007 and 2011 (Hawe and Cockcroft 2013).

Across the UK, private health insurance policies are held by 10.6 per cent of the population. Most of these are corporate subscriptions, offered to employees as part of their overall remuneration package (LaingBuisson 2017).


Diagram illustrating the taxation funding model

What is it?

Tax revenues are collected to fund health care.

How does it work in principle?

Tax-funded models typically seek to pool risk across large populations and make health services available on a universal basis.

Taxes vary according to:

  • how they are levied: direct taxes are levied on individuals, households and companies by the government (eg, Income Tax, Corporation Tax), whereas indirect taxes are applied on the manufacture or sale of goods and services (eg, Value Added Tax, import/export taxes)
  • who is raising them: taxes raised by central government may be used to finance national spending on health care; taxes raised by local government may be used for spending on health care in a specific region or local area
  • whether they are raised for general purposes or earmarked for a specific use – the latter is known as a hypothecated or earmarked tax (see box).

How is this model applied in practice?

Australia, Canada, New Zealand and the Nordic countries are some of the other countries that rely mainly on general taxation to fund health care. However, no country relies on general taxation alone; they may also have user charges or elements of private insurance. For example, in Canada, about 70 per cent of health spending is publicly funded though taxation, with the remaining 30 per cent largely accounted for by out-of-pocket spending (costs borne directly by patients) (14.6 per cent) and private health insurance (12.2 per cent) (Canadian Institute for Health Information 2016).

Methods of levying tax vary considerably between different countries, particularly whether they are raised by central or local government. In Sweden, for example, public funding for health care comes from both central and local taxation. In 2013, local taxes accounted for 68 per cent of county councils’ total revenues, 18 per cent came from subsidies and national government grants financed by national income taxes and indirect taxes (Mossialos et al 2016).

Source: King’s Fund

Hospital bed numbers – can the downward trend continue?

Since sustainability and transformation partnerships (STPs) published their plans late last year, the issue of the number of NHS hospital beds has been rising up the health care agenda. Alongside integrating health and social care and boosting primary and community services, some STPs – for example Dorset, Derbyshire and some STPs in London – have included proposals to reduce the number of hospital beds in their plans.

Subsequently, some stakeholder groups have voiced concern: for example, the Royal College of Emergency Medicine thinks that the NHS needs more beds, not fewer, if it is to meet performance targets. So we decided to look into the number of hospital beds, explore trends and ask if it’s realistic to reduce numbers further in the coming years.

Hospital Beds

The NHS has been reducing the number of beds for decades: since 1987/8, the total number has more than halved from around 299,000 to 142,000. Within that, the numbers of beds for people with learning disabilities and mental health problems have fallen more substantially – by 96 and 72 per cent respectively. Several changes in the way that care is provided have made these reductions possible. For example, care for people with mental health problems and learning disabilities has gradually shifted from institutional settings into the community; technical improvements in surgery have meant more patients undergo day surgery – in cataract surgery almost all operations are now day cases; and average length of stay for hospital patients has fallen from eight to five days over the past 15 years thanks to developments in clinical practice and how patients are managed.

But can this downward trend in number of beds continue?

On the one hand, there are clearly opportunities to use hospital beds more productively. As the Getting It Right First Time initiative has highlighted, there are substantial variations in average length of stay for some procedures across different hospitals. Variations in how complex older patients are managed means these patients spend more days in hospital in some areas of the country than in others. And many patients experience delays in the discharge process meaning they spend time in hospital when they are no longer benefiting from being there. In July this year, more than 5,860 beds were occupied by patients whose discharge was delayed. Progress in these areas would help to make more productive use of existing hospital beds. While national NHS leaders are keen to make such progress, it is unlikely to be straightforward, as recent tensions between NHS England and local government over efforts to cut delayed transfers of care exemplify.

On the other hand, however, today there are a number of factors that make the wisdom of reducing the number of hospital beds far more uncertain than it may have been in the past. England’s population is growing and ageing: by 2030 one in five people in England will be aged over 65, and therefore more likely to need health care. Demand for hospital care is rising with increases in A&E attendances, emergency admissions, and elective admissions. In turn, bed-occupancy levels in hospitals have risen to new highs in the past few years; in 2016/17 overnight general and acute bed occupancy averaged 90.3 per cent. Reductions in average length of stay have slowed in recent years, and may well slow further in the years ahead. Out-of-hospital services – particularly intermediate care and social care – which play a key role in supporting people as they leave hospital are under real strain with access to publicly funded social care becoming more difficult. Finally, the simple fact that the vast majority of beds for those with mental health problems or learning disabilities and beds for the long-term care of older people have already been closed means there is very little scope to reduce numbers further. Instead, future reductions in the number of hospital beds would mean reducing the number of acute beds, which historically has been more difficult. These factors help to explain why the pace of reduction in the total number of hospital beds has slowed in recent years – falling only around 4 per cent between 2012/13 and 2016/17 – and why bed-occupancy levels have risen.

The NHS’s record over the past 30 years is one of success. Adopting new ways of providing care has allowed the service to provide higher-quality care to increasing numbers of patients while reducing the number of hospital beds. But it doesn’t follow that the number of beds can be reduced indefinitely. Today circumstances make it less clear how patient needs are going to be met effectively if more beds are closed – particularly in light of the lack of money to develop alternative out-of-hospital services. So, while some areas may be able to safely reduce the number of beds, substantial reductions in the total number of NHS hospital beds in the next few years seem neither achievable or desirable.

Source: Leo-Ewbank at the King’s Fund