The UK centre right has looked on enviously as Sweden has privatised much of its health service in recent years

On Kungsholmen, one of the islands on which the Swedish capital Stockholm is built, stands what some consider to be the future of National Health Service under David Cameron: St Göran, a six-storey redbrick hospital that makes profits from the state by treating patients.

Emblazoned with the name of its corporate manager, Capio – rather than the Swedish state, which constructed it – the hospital has for a decade been the mascot of pro-market Scandinavian policies that are widely admired by the coalition in Westminster.

Despite its reputation as a leftwing utopia, Sweden is now a laboratory for rightwing radicalism. Over the past 15 years a coalition of liberals and conservatives has brought in for-profit free schools in education, has sliced welfare to pay off the deficit and has privatised large parts of the health service.

Their success is envied by the centre right in Britain. Despite predictions of doom, Sweden's economy continues to grow and its pro-business coalition has remained in power since 2006. The last election was the first time since the war that a centre-right government had been re-elected after serving a full term.

As the state has been shrunk, the private sector has moved in. Göran Dahlgren, a former head civil servant at the Swedish department of health and a visiting professor at the University of Liverpool, says that "almost all welfare services are now owned by private equity firms".

Thanks in part to the outsourcing of the state, Sweden's private equity industry has grown into the largest in Europe relative to the size of its economy, with deals worth almost £3bn agreed last year. The key to this takeover was allowing private firms to enter the healthcare market, introducing competition into what had been one of the world's most "socialised" medical systems.

Business-backed medical chains have sprung up: patients can see a GP in a centre owned by Capio, be sent to a physician in the community employed by Capio, and if their medical condition is serious enough end up being treated by a consultant in a hospital bed in St Göran, run by Capio. For every visit Capio, owned by venture capitalists based in London and Stockholm, is paid with Swedish taxpayers' cash.

The company's Swedish operation now has 4,500 employees, with a turnover of about £500m. Westminster wonks have monitored Capio's success closely ever since St Göran was allowed to be taken over in 2000. There are now six private hospitals funded by the taxpayer in Sweden, about 8% of the total.

In Britain the coalition has mimicked this approach. Circle, backed by private equity firms, runs Hinchingbrooke hospital in Cambridge. Serco, a FTSE 100 company, is eyeing the George Eliot hospital in Nuneaton, and two hospitals may be privatised in south London as a result of bankruptcy.

Dahlgren says: "The difference between Sweden and England is that privatisation of a hospital was only considered when you had big financial problems. St Göran was considered one of the best when it was sold."

Capio's executives dispute that they have simply "made the best better". They say they focus on improving standards, arguing that only by attracting more patients and managing costs can they make money from healthcare.

During an hour-long presentation to the Guardian, St Göran's chief executive, Britta Wallgren, says the 310-bed hospital, serving 430,000 people, outperforms state-owned rivals inside and outside the country.

She says emergency patients see a doctor within half an hour, compared with A&E waits of up to four hours in the NHS. "We took an A&E department that dealt with 35,000 patients a year and now treats 75,000," Wallgren says. "As admissions grow and we have an increasingly elderly population so must our performance improve."

Capio stresses that St Göran has low levels of hospital-acquired infections, and patient surveys record high levels of public satisfaction. It has also produced year-on-year productivity gains – something the state cannot match. Thomas Berglund, Capio's president, says the "profit motive works in healthcare" and companies run on "capitalism, not altruism".

He adds: "We have just won the right to run the hospital again and will have to reduce costs by 120m Swedish krona [£11.2m] over 10 years. That's our profit gone unless we keep reducing costs here."

At the busy entrance to the hospital, Swedish patients appear resigned to the end of state ownership in health, once a cornerstone of the country's generous welfare system.

"I am one of those Swedes who do not agree that private hospitals should exist," says Christina Rigert, 62, who used to work as an administrator in the hospital but resigned "on principle" when it was privatised a decade ago.

Now back as a patient after gastric band surgery, she says: "The experience was very good. I had no complaints. There's less waiting than other hospitals. I still do not think there should be private hospitals in Sweden but it's happening."

Since 2010 private companies have had the right to set up large GP-style services anywhere in the country – and to be paid for it out of taxpayers' money. Corporates have set up 200 healthcare centres in two years, although critics point out that the majority have been in wealthier urban areas.

Dahlgren says that inequalities are growing, adding that the law is "fundamentally antidemocratic". Sweden, he explains, has a long history of local governments deciding where GPs should be sited to ensure poor or rural areas do not lose out.

"The local councils can now neither determine the number of for-profit providers to be financed by taxes nor where these tax-financed services are to be located," he says. "This is determined by the private providers on the basis of profitability rather than the health need for these tax-financed services. It is remarkably antidemocratic."

There are distinct differences between Sweden and Britain. Swedish political culture is much more consensual than in Britain, and strongly centred on people choosing where to get healthcare.

Leftwing governments in Sweden, who ran the country for 65 of the last 80 years, promoted patient choice between state-owned hospitals. The real shock was when centre-right governments argued in the 1990s that for patient choice to work, competition and privatisation in healthcare were needed.

The Social Democrats, the main Swedish opposition party, have given up the idea of renationalising the health service and instead argue that profits should be capped and quality of care more tightly regulated. With hardline opposition to private healthcare limited to the far-left parties, Swedes are likely to see more changes.

In Stockholm, more than 500 beds are being removed from the country's best known health centre, the Karolinska University hospital, and the services are being moved into the community to be run by private companies, a policy that in England would almost certainly lead to demonstrations.

Pro-marketeers argue that companies can improve patient experience at a reduced cost, and expand provision at a time when the state cannot afford to do so. This view was challenged last year when a business-backed research institute, the Centre for Business and Policy Studies, looked at the privatisation of public services in Sweden and concluded that the policy had made no difference to the services' productivity. The academic author of the report, who stood by the findings, resigned after a public row.

There have also been scandals involving claims of shocking treatment of some patients. Last year Stockholm county council, which controls healthcare for a fifth of the Swedish population, withdrew contracts from a private company after staff in a hospital were allegedly told to weigh elderly patients' incontinence pants to see if they were full or could be used for longer.

Stig Nyman, a Christian Democrat member of the council instrumental in ushering in a pro-market health policy for 20 years, says he still believes private business is necessary.

Over coffee and biscuits in his modern office amid the 19th-century neoclassical columns of the council building, Nyman dismisses the allegations of mistreatment. "We have hundreds of contracts with private firms. In this case journalists found five or six mistakes. It's not a big deal.

"In healthcare, companies drive up standards. We pay 5,000 Swedish krona [£465] a patient on average. We force people to compete on the quality of service and treatment."

Perhaps most damaging for private investors drawn by the potential profits to be made from the state has been the probing of their affairs by tax inspectors. The industry has been under scrutiny since 2007, when a spate of high-profile deals, including the buyout of Capio, led to investigations into financiers.

The charge is that private equity firms siphon profits out of the state's coffers while avoiding their fair share of taxes. Berglund, of Capio, says: "It is always thrown about that we are not paying taxes but it is not true."

Swedish tax authorities are, however, taking some companies to court because pay in private equity groups is often linked to the profits made on deals and has been incorrectly taxed for years, it is said, at rates lower than that required for income in Sweden.

Earlier this month one of Capio's owners, a private equity firm called Nordic Capital, lost a court case against the Swedish tax agency, leaving it with a bill of 672m Swedish krona [£63m]. The authorities, it is reported, will also slap a tax bill collectively of 2.6bn krona on another 34 individuals.

"There has been a strong reaction in Sweden. These people have been paying themselves enormous sums of money," says Dahlgren. "It should be a worry for every health system where you have competition and private firms arriving."