Tuesday, March 04, 2008

Incentivising Dysfunction

Same site - different parking charges

One of Big Government's chronic and incurable maladies is the problem of perverse incentives. In seeking to control everything from above, it routinely incentivises its coalface operators to act against its own supposed intentions.

Take parking charges at NHS hospitals. The Doc has been taking heavy flak over his defence of the practice. He says:

"The costs of maintaining a large piece of empty tarmac in English cities is huge. Why should the taxpayer foot the bill?"

Why indeed? Low tax zealots like Tyler should break into spontaneous applause.

And yet, something doesn't feel quite right. Sir Stuart doesn't charge for parking at his M&S megastore in Camberley. He doesn't even charge for parking at his store on the edge of Russian plutocrat St George's Hill, Weybridge. His customers may embrace paying for eco-bags, but he knows they'd be driven into a frenzy of irritation if he charged for parking.

M&S customers want a warm giving bag-for-life relationship with Stu and Twiggy. They don't like to feel he's trying to chisel them at every turn, and he understands and values that. Long term relationships are built on trust and commitment, and that must cut both ways.

And come to that, private hospitals don't charge for parking either. The closest one for those plutocrats is the BMI Runnymede, and there parking for those RR Phantoms, McLaren F1s etc is absolutely totally free (see here).

Yet if by some mischance they ventured into their local NHS hospital, St Peter's, they'd have to pay and display. A difference made all the more visible by the Runnymede sharing the same site with St Peter's. Indeed, to reach the Runnymede's plush carpets, free coffee, and free parking, those plutocrats have to drive through the paying NHS carpark. It gives them a great chance to sneer at the peasants feeding the ticket machines, and it must thereby put them well on the road to recovery before they even step inside. But what does it do for the NHS patients?

So why have NHS hospitals taken to levying this additional and highly contentious "tax on the sick"? They never used to.

It's the money, of course. Parking charges now raise about £100m pa, with some hospital trusts getting more than £2m pa.

£100m may sound a lot. But actually, to the NHS it's a drop in the bucket. We're already paying the best part of £100 billion pa through our taxes, so £100m is actually only about 0.1% of total NHS income. Can it really be worth all that heat and resentment among customers who are already shelling out 1,000 times more than this highly visible charge brings in? Won't people feel they're being fleeced- forced to pay twice?

The truth is nobody up there has given the issue much thought. The hospitals have been unintentionally incentivised to do it by the way the NHS works.

See, the vast bulk of NHS money is in the hands of Whitehall. And Whitehall attaches its own elaborate strings when dishing it out. So hospitals seeking unconditional income to spend without recourse to Whitehall are forced to be inventive. And with few options available, parking charges are very appealing.

Private hospitals are in a much better position. They can levy an explicit all-in charge for the whole service, and then simply concentrate on providing that service and caring for the customer. But NHS hospitals are driven to chiselling round the edges. The NHS command and control system perversely incentivises a dysfunctional front-end relationship with the customer.


Remember too those bunker commands to eliminate hospital financial deficits (see many previous blogs eg here). In their own terms they've been highly successful, with a £1.8bn "surplus" forecast for this year. But at what cost? Michael Summers, of the Patients’ Association, says:

“When wards are closing and hospitals are cutting back on cleaning and nursing staff up and down the country, it is quite astonishing that they are generating such a huge surplus.”

Well, actually, it's not astonishing at all Michael. The imperative to cut costs has generated huge surpluses by incentivising service cuts. Simple as.

See, out in the real world, people like Stu and BMI hospitals understand that the customers pay their wages. Directly. And the best way of ensuring they go on paying is to convince them that you care. About them.

The one thing you do not want is the customer getting the idea that all you care about is their money.

PS I know what you're thinking- what about the banks? They don't care about their customers, they fleece them at every turn, and yet they do just fine. So what's the big deal? Yes I accept the banks have got away with murder for many years, but times I believe, are slowly changing. The internet is giving consumers more information and control over their money, and don't forget the grim reaper is currently abroad among the money changers which should concentrate a few minds. Besides, even the banks don't charge for parking.

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