Johann Hari: Why choice and competition may be the last chance to save the NHS

As long as the system is free at the point of use, who cares?

The evidence suggests not. If you study it, you find that grafting the concept of choice on to a taxpayer-funded NHS is not a way of dismantling Nye Bevan's creation. No: it is Britain's last chance to make it work.

When Labour came to power promising to save the NHS, the system faced two huge problems. The first - and the most obvious - was the Tories' chronic underfunding of public services in order to pay for tax cuts. By 1997, they had whittled health spending down to just 5.7 per cent of our GDP, the lowest in the developed world. By comparison, France spent 9.3 per cent and Germans coughed up 10.3 per cent: is anybody surprised Brits were sicker and died younger?

This sickness has been slowly drugged away with cash over the past seven years. After two wasted years when Labour stuck to Tory spending plans, NHS spending has risen by 7.4 per cent a year, and by next year we will hit French levels of funding. But as extra cash finally began to cascade into the NHS in the late 1990s, the Government noticed a second problem, hidden for years by the Tory drought. The extra money was not buying anything like as much improvement as it should. Waiting lists were barely budging. It became clear that running the NHS like an old nationalised industry - with politicians at the top setting targets and screaming for results - wasn't working.

Why? Partly, it's because the system was riddled with perverse incentives. For example, there was little relationship between the number of patients a hospital treated and the budget it was given. Often it ran the wrong way: if a ward was inefficient, treated patients slowly, cancelled more operations and built up big waiting lists, it was more likely to be given funds by the Department of Health because it could argue that it had a greater need. With the best intentions, the NHS was too often structured to reward poor performance - and it got it. Without any way to read signals from the people using the service - is this good? did you hate that? - the NHS was structurally incapable of consistently improving in the way (say) Tesco or Safeway do every week.

If this model had continued - a flailing little command economy in the midst of a 21st-century consumer society - the case for an NHS free at the point of use would have slowly died. The writing was on the hospital wall: a populist Tory would one day come along, appeal to growing middle-class discontent and argue - as Michael Howard tried to at the last election - for subsidies to help the middle class to flee into the arms of Bupa. The NHS would be left as a rump, treating only the poor - and services for the poor very quickly become poor services.

The Government gambled that another NHS is possible. Simon Stevens, Blair's health policy advisor from 2001-4, explains the logic when he talks about "an increasing appreciation of the fact that health care improvement requires a source of tension to overcome the inertia inherent in all human systems. The past five years have seen England searching for the optimal policy mix to generate that constructive discomfort."

The Tory way of creating that "constructive discomfort", that hunger to improve the service, is to introduce the raw price mechanism: if you've got the money, come this way - and if you haven't, the queue starts there. But the Labour way has been to create choice within the NHS and make the tax money follow the patient. You need a hip operation? From the end of 2005, you will be given a choice of five hospitals, some in the NHS, some private. Your GP will help you pick one, talking you through the evidence about their waiting times, their cancellation rates, which one can provide the most convenient date for you, and so on. The taxpayer still picks up the full tab. The good parts of the health system will slowly be rewarded, and the bad parts will wither.

It's a simulacrum of market processes, keeping the best things about them (innovation and responsiveness) and ditching the downside: the fact they only serve those with enough cash.

Some people have mislabelled this as "part privatisation", because the Government has sometimes used tax money to send Granny Bloggs to a spare bed in a private hospital if she has been waiting in agony for a space in an NHS hospital for months. But as long as the system is free at the point of use, as long as my gran gets the same treatment as a duchess, who cares? How is it privatisation if the Government pays?

It's important to separate out what matters in this debate from what doesn't. The absolutely sacrosanct principle is that we all collectively pay for each other's healthcare through tax, and you get treated according to your need, not your ability to pay. Any hint of co-payment, any question of up-front charges, would be a violation of that principle, and would be a scandal. But once the service is free, the question of where you actually get treated should simply be a matter of technocratic problem-solving: what works best?

And the evidence is in: introducing competition and choice into the free-at-the-point-of-use NHS makes the service much better for the poor and middle-class people who depend on it. Since devolution, the English have been injecting choice and competition into their NHS, while Scotland and Wales have been squeezing them out of theirs. The BBC commissioned the University of Nottingham to study the results. They were devastating for the anti-choice campaigners. Even though the Scots and Welsh spend 25 per cent more on their health services, their systems are "much worse", the study found.

While waiting lists have plummeted in choice-and-competition England, waiting lists have risen "exponentially" in anti-choice Wales. The English think their NHS is slowly getting better; the Scots think theirs is getting "much worse". So competition drives down waiting lists and drives up support for a free NHS. Remind me again why we were frightened?

It isn't Nurse Tony and his choice-flavoured medicine that would kill the NHS. The only thing that can kill it is a dogmatic refusal to help this limping fiftysomething health service into the operating theatre. Without reconstructive surgery, it will be in no position to fight the Tories when - one day - they return to power.

j.hari@independent.co.uk