Health Re - how to help the NHS save tens of billions
Not many people know that the NHS has its own insurance company, of sorts. It isn't collecting any premium from NHS Trusts, but it is paying all of the organisation's negligence claims. It's called NHS Resolution. Here's how The Insurer of State could help it and the health service do better.
The Insurer of State is a central bank for indemnity, not credit
A core tenet of The Insurer of State is that it can create money. It is, in effect, a type of central bank. Its money, however, is only lent to a single type of entity. That entity is known as a Loss Purpose Vehicle. It borrows money from The Insurer of State to create liquidity for an indemnity event. It isn't creating money for capital markets for credit. That is a distinct feature.
Crucially, this created money is used to buy a bond which pays a dynamic coupon. That coupon represents a fixed proportion of the quarterly receipts of a levy placed on all insurance product sales that we've called the State Insurance Premium. It is mandatory, and may be different for each class of insurance. That means, Private Medical Insurance and Medical Malpractice Insurance classes will each create premium income for the Insurer of State.
Creating Money for indemnity
This is novel to the capitalist Western world. It basically allows money to be created that is secured not by the government, but by the private sector's demand for risk transfer. So long as one policy is sold, all the outstanding bonds ever issued (and their coupons) can be maintained. Think of it as a hidden balance sheet for the state.
Money creation has, though, caused a lot of problems in the credit markets. Money is typically created by banks in the form of loans and credit. That money is usually designed to create growth, more money. If too much credit is issued, that money has to chase opportunity - and it tends to drive up price and devalue itself.
Indemnity is not credit. Indemnity puts back together what was broken. Just as you wouldn't expect to take a loan out from your home insurer if your house burnt down, nor should the economy fix all shocks with credit. Insurer of State offers the economy a captive means to create risk transfer across time and between the credit market and the new indemnity platform we create. Without it - all state contingent liability and invisible risk transfer is ultimately funded by state credit - because that is how all money is created.
Where does the NHS come in?
Let's consider one of the state's biggest ministries and budgets, the NHS. It is a massive £204.9bn per year. It is split between capital expenditure, and the larger, bulkier Resource Departmental Expenditure Limit (Resource DEL). This section is responsible or all day to day costs.
It is also responsible for paying all the negligence and compensation claims made against the NHS. The NHS effectively self-insures. NHS Resolution works at "arms length" and focuses on "resolving concerns and disputes fairly, sharing learning for improvement and preserving resources for patient care." That means it pays the losses generated by NHS negligence cases across the country. It is both a noble and necessary institution, because people will make mistakes and sometimes behave poorly. Without it, the NHS wouldn't be able to function for the citizenry.
Yet, the cost of this track of expenditure is staggering. NHS Resolution settled £2.8bn in 23/4 across its agreed compensation and upheld negligence claims. Elected officials described the sum as "astounding". But the rabbit hole of this budget goes deeper. Because the Department of Health in 23/24 also set aside a massive £58.2bn provision for what they deem to be likely future claims. All of this comes out like a form of austerity from the NHS Resource DEL.
Health Re and The Insurer of State
Regardless of your political preference, one cannot engage on this topic without it being political. It is the ultimate political subject. So let us be emphatic:
The following hypothetical suggestion does not advocate for changing the NHS' "Free at the point of use" service. The following suggestion does not advocate privatising the NHS. The following suggestion does not privately insure the NHS.
The Insurer of State could, in the simplest terms - give the NHS every single penny of that £2.8bn back. It would pay it as an "insurance claim". The premium, the capital? Well, it could either indemnify NHS resolution from money it has collected through State Insurance Premium yields, or create money specifically to pay for the claims in a given year, or a mixture of both.
Can you think of any other policy proffered by a think tank or another organisation that can immediately provide the NHS with £2.8bn without immediately raising taxes or cutting spending? There simply isn't one.
How would Health Re work?
Instead of using the NHS budget, a platform could be set up and funded with the yields from related medical insurances. This would be called Heath Re. It could then use some of that funding to transfer one or more layers of risk BACK to the private sector. Using all the premiums of the buyers to fund the premium it pays to reinsurers.
That would mean between its collected premiums and its ability to create money, a layer of privately funded risk transfer could, in theory, be used. That is the first option to make this entity a Public/Private vehicle.
Doing this would allow a new arm's length risk management to be utilised. With a placement broker acting on behalf of the state to secure good terms. Insurance Brokers like Lockton already serve private medical groups like BUPA. They and the insurers used would employ best practice risk management and warranties.
If and when that layer of risk transfer was exhausted, fear not. Because the Insurer of State can always create money and then secure it with a bond whose coupon is correlated to the State Insurance Premiums levied on medical-related private insurances. Whilst this may have the distortionary impact of hardening medical rates - the wider economic picture would support it and likely make capital inputs for carriers in those spaces less strained. It would also allow for greater alignment across public and private risk management practices.
So there you have it. If you want to save the NHS £58.2bn in provisioned liabilities - there is a mechanism to do so. There is a theoretical platform which our country could use to separate NHS risk from actual medical budgets. The Insurer of State could then protect the state's obligation over this liability from the state credit markets. Markets where its structural deficit now exceeds its existing interest payments.
Far from creating inflation or damaging the UK, the prospect of an Insurer of State could relieve the death spiral of the state's finances entirely.
It is time to model this theory appropriately, and we welcome your future support as and when we move to do so.