SALLY EVANS is 75 years old. She lives on her own in a bungalow in Castle Cary, a market town in Somerset, where she loves to knit and tend her garden. Both hobbies are harder than they were; Mrs Evans has a bad back and, like two-thirds of British adults, she is overweight. She also has diabetes, high cholesterol, chronic heart failure, high blood pressure, hyperthyroidism, incontinence and gout. All of which are made worse by a waning memory.

Like health-care systems around the world, the National Health Service (NHS) is struggling to provide good care at low cost for patients such as Mrs Evans (not her real name). Its business model has not kept up with the changing burden of disease. For as more people enter and live longer in their dotage, demand increases for two costly types of care. The first is looking after the dying. About 25% of all hospital inpatient spending during a person’s lifetime occurs in the final three months. The second is caring for those with more than one chronic condition. About 70% of NHS spending goes on long-term illnesses. More than half of over-70s have at least two and a quarter have at least three. In south Somerset 50% of health and social-care funding is spent on 4% of people.

The same pattern is found across the NHS, and it is struggling to cope. The pressures on the service once felt only in winter are now present throughout the year (see chart 1). Performance against waiting-times targets for cancer treatment and emergency care has deteriorated. The British Medical Association, a doctors’ trade union, is threatening strikes in October, November and December as part of a year-long dispute over a new contract. Jim Mackey, chief executive of NHS Improvement, a health regulator, puts it bluntly: “The NHS is in a mess.” When it was established in 1948, the NHS was the first universal health-care system free at the point of use. It is the institution of which Britons are most proud. No other country’s health service would have had a slot in the opening ceremony of an Olympic games, as the NHS did in 2012 in London. And yet it is of middling quality. England has a few world-leading hospitals. It vaccinates more people against influenza and screens more women for cancers than most rich countries. But its performance on standard measures of quality—such as survival rates from cancers, strokes and heart attacks—compares badly. If one fallacy about the NHS is that it is the envy of the world, as its devotees claim, another is that it is a single organisation. In fact it is a series of interlocking systems. Public health, hospitals, general practitioners (or GPs, the family doctors who provide basic care outside hospitals) and mental-health services all have separate funding and incentives. Social care, which includes old-folks’ homes and the like, is run by local councils, not the NHS.

Governments have relentlessly tinkered with this complex system. Since 1974 there has been a reorganisation of the English NHS about once every two years. (Scotland, Wales and Northern Ireland have their own autonomous services.) The most important was in 1990 when the Conservative government introduced an “internal market”. Before the change, regional health authorities had been responsible for almost every aspect of running hospitals. The reform divided the bureaucracy in two. Henceforth one part of the NHS would be responsible for buying services from hospitals and another would be in charge of running them. The subsequent Labour government encouraged more competition and made it easier for private hospitals to provide NHS treatment. It also unleashed a tsunami of targets.

The Health and Social Care Act, passed by the Conservative-led coalition in 2012, was described by a former head of the NHS as a reform so big it could be seen from space. But it has changed little on Earth. Today 209 “Clinical Commissioning Groups” are simply the latest parts of the NHS to purchase services from providers of care, usually hospitals. Paul Corrigan, a former adviser to Tony Blair, says the NHS is still a system set up to fix acute problems, not to treat long-term conditions. He compares recent reformers to someone “trying to connect their iPhone to a landline”.

One aim of the 2012 act was to prevent ministers from micromanaging the NHS. But the reality is closer to the ideal of Aneurin Bevan, the post-war Labour health secretary who wanted the echo of bedpans hitting the floor in Tredegar to reverberate in Whitehall. Most Monday mornings, Jeremy Hunt, the current health secretary, gathers officials to go through the indicators for each NHS trust, line by line. Afterwards hospital bosses are told to shape up.

But pep talks can only go so far. To fix the NHS requires changes in three areas. First, funding. Second, hospitals’ efficiency. And critically, third, reducing demand for unnecessary treatments through better public health and joined-up care.

Since 1948, spending on the NHS has grown by an average of 3.7% per year. From 2010-11 to 2020-21 growth is set to average 0.9%. On a per person basis the budget will hardly budge—a big departure from the 2000s, when it shot up by 70%. NHS finances are “in a much worse position than they have ever been”, says Chris Ham of the King’s Fund think-tank.

“It is all about the money,” adds Jennifer Dixon of the Health Foundation, another think-tank. No other rich European country is going through as steep a deceleration in funding. Britain-wide spending on health as a share of GDP in 2014-15 was 7.3% (£134 billion or $180 billion), lower than in most of its peers. It is projected to fall to 6.6% by 2021. If demand grows as forecast by the NHS, and it makes no efficiency savings, the service faces a shortfall of about £20 billion by 2020-21 (see chart 2). It is already on the verge of crisis. Several hospital divisions face closure, according to Chris Hopson, head of NHS Providers, which lobbies government on behalf of the local trusts that run services. Nearly nine out of ten hospital trusts ended the last financial year in deficit. Their costs rose as their income fell, a result of the government reducing the amount it paid per treatment. When companies are in the red they eventually go bankrupt. When trusts are in the red they are typically bailed out and told to improve. Since most of them are in trouble, in July the NHS opted to “reset” trusts’ financial and performance targets. Rising patient frustration may force the government to increase funding. But historically the public has been keener to fetishise the NHS than pay for it. Polls suggest that only a minority of people would be prepared to pay more in general taxation to boost its funding. This has led some wonks to propose a dedicated “NHS tax”. Though the Treasury is almost genetically sceptical of hypothecated taxes, the idea is popular among health officials and, more surprisingly, Conservative MPs. Andrew Haldenby of Reform, a think-tank, suggests that there could be charges for services such as seeing a GP, as is the case in about two-thirds of members of the OECD rich-country club. Though this idea is controversial, the NHS has since 1952 charged for seeing a dentist and for prescriptions. “There is no Rubicon to cross,” says Stephen Dorrell, a Conservative former health secretary.

Then there is a more radical option: ditch the taxpayer-funded model altogether and replace it with health insurance. Typically the French, Swiss or German model of universal social insurance is pitched, as opposed to the American model. This is not a new idea; William Beveridge, who proposed a national health service during the second world war, preferred it. Its supporters argue that in countries that mandate health insurance, more money is spent on health and outcomes are better, partly as a result of competition between providers. One recent paper calling for social insurance in Britain is entitled: “What are we afraid of?”

“An administrative mess” is the answer. After the chaos of the 2012 reforms there is little appetite for a shift in funding models. Most officials, and not only in the health department, believe that the cost of moving to social insurance would outweigh its benefits. They argue that what you spend is what you get: Britain spends less on health and its outcomes are worse than those of its peers. “Social insurance is a red herring,” says one senior Conservative.

Tightening the tourniquet

So the NHS must do more with what it already spends. A sign of inefficiency is the 6,000 patients in English hospitals who are ready to go home but not yet discharged, up from 4,000 in 2013. They cost the service hundreds of millions of pounds per year and obstruct others from treatment. The bed-blockers themselves are harmed, too. Elderly patients lose up to 5% of muscle strength for every day they are laid up in hospital. Some delays are the result of council cuts: about 400,000 fewer old people receive social care than in 2010, meaning that hospitals are sometimes used as expensive alternatives to care homes. But most are due to how hospitals are run.

A review published in February by Patrick Carter, a Labour peer, concluded that “most [hospitals] still don’t know what they buy, how much they buy, and what they pay for goods and services.” There is huge variation in costs and outcomes. For hip replacements, hospitals pay between £788 and £1,590 for similar prosthetics. Rates of deep-wound infection, an avoidable complication, vary from 0.5% to 4%. Reducing the average to 1% would improve the lives of 6,000 patients per year and save £300m. Some trusts always use the recommended “cemented” fixation method for replacements, others for only one in 50 operations. And implementation of good ideas takes too long—about 17 years for scientific discoveries to enter day-to-day practice, by some estimates.

This is not helped by the way hospitals are paid. The NHS tariff system rewards repeat activity rather than innovation. Iain Hennessey, a paediatric surgeon at Alder Hey hospital in Liverpool, wanted to use Skype to show parents remotely how to remove their children’s dressings. Yet he was prevented from doing so because the tariff price for a “telemedicine consultation” was too low. Patients instead came into hospital for more expensive treatment. Sir David Dalton, head of Salford Royal hospital, says such practices reflect the NHS’s “institutionally low tolerance to risk”.

This conservatism is also apparent in its approach to its workforce. The English NHS is the biggest employer in Europe. It employs 1.4m people, or 5% of England’s workers. Staff costs account for more than two-thirds of hospitals’ budgets. But England has more shortages of hospital staff than other rich countries. In 2013-14 the NHS spent £3.3 billion on agency staff to cover gaps. Overtime costs rose, too. A consultant in Lancashire last year earned £374,999 in overtime. His basic salary: about £89,000. This is because the pay and volume of NHS employees are still centrally planned many years in advance via a system one official calls “Soviet”.

Some of these problems would be fixed by recognising that there are too many hospitals. Across the world hospital chains are scaling up. Simon Stevens, the NHS’s chief executive, cites health firms such as Apollo in India, Helios in Germany and several American outfits that have saved money through shared staffing, back-office functions and procurement. Specialised care is better at scale. “Surgery is about practice and volume,” explains Mr Hennessey of Alder Hey. When Denmark reduced by two-thirds the number of hospitals that perform colorectal cancer surgery, post-operative mortality rates after two years improved by 62%. In Germany, higher-volume cancer-treatment centres have fewer complications than others. Fewer people have died of strokes in London since it merged 32 specialist sites into eight.

“England has great attachment to the general hospital but it is a broken model,” says Sir David of Salford Royal. In a recent review for the government, he suggests that the 154 trusts that run hospitals should be reduced to 40-60 larger ones. It could be made easier for high-performing trusts to take over bad ones, and for private providers to take over failing hospitals.

Under the knife

Yet making up the funding shortfall through efficiency savings alone would require a bigger gain in productivity than any in the history of the NHS. And the fundamental problem remains that demand for hospital services is outpacing what the NHS is supplying. Referrals to hospital have risen by 20% since 2009-10, about three times as much as NHS spending.

Curbing demand will be critical to the NHS’s long-term viability. This is partly about public health. Mr Stevens has described obesity, for example, as “the new smoking”. About one-third of English children are overweight, compared with an average of one-fifth across the OECD. Nevertheless, funding for public health is falling and the new government has slimmed down plans to reduce child obesity.

This will only increase pressure on the NHS. In response, it will need to rein in demand for expensive hospital treatment by changing how non-hospital care is organised. Since the NHS is largely free at the point of use, governments have managed demand via GPs, who act as gatekeepers to hospital and prescriptions. And yet most GP practices are “artisan shopkeepers in an age of Amazon”, according to one Whitehall official. They are ill-equipped to deal with rising demand.

If hospitals have suffered from relentless overhauls, GPs have received malign neglect. Though the vast majority of contacts between patients and the NHS are carried out by GP practices, they receive only about one-tenth of the NHS budget. The deal between GPs and the NHS is one of the most complex public-sector contracts in the world. Their funding is based on the number of patients in their area (adjusted for demographics) and whether the GPs meet targets set by the government. A study published in May by the Lancet, a medical journal, concluded that this framework of targets had not led to any “significant changes in mortality”. Gwyn Harris, medical director of Modality partnership, a group of GPs, goes further. Under what he calls an “inverse pay law”, those GPs who spend more on services which might keep patients out of hospital, such as a home visit by a nurse, make smaller margins. The worst doctors have the best returns.

On average, the framework made GPs some of the highest-paid family doctors in the world when it was introduced in 2004. But since then it has become less generous. GPs’ real-terms income has fallen by one-fifth. This, and poor planning, has led to a shortage of them. England needs 5,000 more in the next five years. The NHS is mulling a deal with Apollo, whereby the Indian health-care firm supplies enough doctors to fill the gap.

Improving the GP system so that it can cope with rising demand will require it to move away from its artisan model, embrace technology and work more closely with hospitals and other parts of the health service. A few GP sites are already expanding. In Birmingham, 17 practices run by Modality cover 65,000 patients. Its GPs are salaried rather than partners, following a trend seen elsewhere in the world (most American doctors were self-employed a decade ago, whereas now less than a quarter are). Modality has a single call-centre for booking patients. Nurses and doctors often attend to patients by phone or video-link. This has reduced no-shows while allowing GPs to spend more time on complex cases. Sarb Basi, Modality’s managing director, thinks that in 20 years there will be just 50 GP providers in England. GP practices are also belatedly embracing technology. Only 2% of people use the internet to contact their doctor. But two practices in Essex, for example, are trialling Babylon, an app that uses machine learning to diagnose symptoms. Others are cleverly using data. When Paul Mears became chief executive of Yeovil hospital he used customer segmentation techniques learned in previous jobs at British Airways and Eurostar. This helped him to realise that unless south Somerset’s fragmented systems worked together to deal with the costliest 4% of patients, he would need three new wards to keep up with demand. To integrate them he launched Symphony, which cares for Mrs Evans. It is one of the NHS’s “Vanguard” projects, many of which are trying to integrate historically separate parts of the system. Symphony took inspiration from the Esther Project in Sweden, in which care for complex patients is organised around their timetables, not those of doctors. Symphony has introduced “care co-ordinators” and “health coaches” who spend hours with patients to work out bespoke care plans. This makes patients feel more in control and has reduced admissions. Nevertheless, the people who run Vanguard projects worry that they cannot transform care without overhauling how money flows through the health system. Budgets remain fragmented. Doctors face competing incentives. Like Mr Stevens, Mr Mears thinks that the future of the NHS lies in Accountable Care Organisations (ACOs). These are increasingly popular ways of organising health care in countries like America, Germany and Singapore. In each case a single provider is responsible for all health care in its area. It is paid for outcomes, not activity. It is given a budget, adjusted for the health of the population. And so long as it meets its targets, it keeps the margin. Mr Stevens wants half of the NHS to use a version of the model by 2020.

The move from “volume to value”—that is, from paying providers for the procedures they carry out to paying them for the outcomes they achieve—has helped to stem the cost of Medicare, the American health system for pensioners. The expansion of ACOs as part of Obamacare led to reduced mortality rates and savings for providers of about 1-2%. But Dan Northam Jones, a visiting fellow at Harvard, warns that the potential for savings is greater in systems like Medicare, where there is no cap on spending.

And yet ACOs reflect a growing belief that if you want radically to improve health care you have to change how you pay for it. They will not solve all the problems of the NHS, some of which are inherent in its taxpayer-funded model. But perhaps its business model may yet catch up with how illness is changing. The NHS should forget being the envy of the world, and instead learn from it.