A Tale of Two National Health Plans

Learning opportunities in funding public health care Chris Pallot and Jennifer Gerstorff

The United Kingdom’s National Health Service (NHS) and the United States’ Medicaid program were both developed to provide comprehensive health care benefits. Both systems have the general goal of finding the balance of quality and efficiency that will promote access to appropriate medical care in a financially sustainable environment. As health care, technology, and governments evolve, the NHS and Medicaid continue to face similar challenges. This article lays out the history, current environment and direction of the two systems, including how they parallel.


The NHS and Medicaid both provide publicly funded medical services to a broad population. The NHS offers coverage to all U.K. residents, whereas Medicaid is intended to provide coverage only for certain low-income cohorts of the population who have the greatest need for low-cost care.

Figure 1: NHS1 and Medicaid2: Comparison
of Spending and Coverage
NHS Medicaid
£116.4 billion 2015–16 budget $554.3 billion FFY 2015 spend
54.3 million residents 68.9 million residents

Source: NHS and Department of Health and Human Services


The National Health Service was born on July 5, 1948. It was launched by the then Secretary of State for Health, Aneurin Bevan. There have been many changes in the structure and function of the NHS but the underlying principle of health care being offered to everyone, free of charge at the point of delivery, has remained. Funding is raised through general taxation and the vast majority of primary, secondary, community, mental health and ambulance care is provided without charge at the point of access. There are some charges applied for prescribed drugs and dental treatment but these do not apply to children, pregnant or immediately post-natal women, seniors or those on low incomes. There is some structural, governance and contractual differences between the NHS in England, Scotland, Wales, and Northern Ireland, but the ethos and driving principles remain the same across the wider service.3
Nonmedical social care services are not provided under the banner of the NHS, but many services are shared with some budgets also pooled. Access to social care support is largely means-tested.

The principle that health care should be available to all, regardless of income, has remained central to the ethos of the NHS to the present day. This is embodied in three core principles:4

  • It meets the needs of everyone.
  • Care is provided free at the point of delivery.
  • Provision of care is based on clinical need, not ability to pay.

These three principles have guided the development of the NHS over more than 60 years and remain at its core.

The 2015–2016 annual budget for the NHS was £116.4 billion and it is expected to rise to £133.1 billion by 2020–2021. Much of this will be needed to fund inflation, leaving a real terms increase of circa £11 billion, equating to a real annual increase of 0.9 percent.5

The NHS is seen as one of the most important political issues in the United Kingdom, often attracting both positive and negative media interest, and it features as a key issue in nearly every election campaign. Historically, the NHS has ranked in some polls as the institution that is “a symbol of what is great about Britain and we must do all we can to maintain it.”6

U.S. Medicaid

Medicaid and Medicare were established July 31, 1965, with an amendment to the Social Security Act (SSA), signed by President Lyndon B. Johnson.7 The two programs were developed to provide health care benefits, with Medicare covering elderly citizens and Medicaid covering low-income children, pregnant women, and disabled citizens. Medicare operates in a manner similar to other U.S. commercial health care benefits in that premiums and cost sharing are required. Medicaid, however, more closely resembles the NHS structure of health care coverage and thus is the focus of comparison in this article.

Medicaid provides comprehensive benefits for mandatory or optional services as outlined by the Centers for Medicare and Medicaid Services (CMS). Each state must offer certain mandatory services, all states offer the optional prescription drug coverage and other optional service coverage varies by state.

Title XIX of the SSA, which grants the funding of medical assistance to certain categorically and medically needy low-income residents of the United States, has been revisited and amended multiple times since its inception:

  • In 1997, Medicaid coverage was expanded under the Balanced Budget Act (BBA), which amended Title XXI of the SSA to extend eligibility for children of families with higher income levels than Title XIX Medicaid eligibility criteria.
  • In 2010, the Patient Protection and Affordable Care Act (ACA) expanded eligibility to cover all adults who were not previously eligible, with household income levels up to 138 percent of the federal poverty level (FPL).
  • In 2016, CMS passed an extensive regulation to modernize the practices around Medicaid managed care, as the delivery of Medicaid services has transitioned largely from a fee-for-service system to managed care in recent decades.

The goal of these policy changes has generally been to extend coverage to low-income, uninsured U.S. residents to increase access to providers and services, and to allow states to create innovative solutions to funding health care.8

In 2010, Don Berwick, President Obama’s then newly appointed administrator for CMS, made incorporation of the Triple Aim one of his highest priority policy goals. The Triple Aim is defined as having three guiding principles: better medical care (measured with safety, effectiveness, patient-centeredness, timeliness, efficiency and equity), better population health and reducing per-capita cost for medical care.9

The U.S. health care market is a main focus in the political arena, as health care expenditures continue to rise as a percentage of gross domestic product (GDP), growing to 17.5 percent in 2014, over $3 trillion. Medicaid made up approximately 16 percent, or a half-trillion dollars, in 2014, doubling in total expenditure amounts since 2002.10


In both the United Kingdom and the United States, health care expenditures in total have been rising faster than GDP since the 1990s.11 In this type of environment, it will always be difficult for funding to keep pace with expenditure growth.


The funding for the NHS is initially decided by Parliament each year, and it is then allocated to the Department of Health. For 2016–2017, this is £120.4 billion. The vast majority is then passed to NHS England for allocation to Clinical Commissioning Groups (CCGs) to purchase care from the provider sector. The issue for the NHS is its ability to live within this allocation, and the increasing deficits that its medical providers are facing. The CCG funding is based on allocation formulas that use information about local populations, such as age, gender, levels of deprivation and the size of a population, in order to predict the level of funding needed in each area to meet existing need. Despite this, the income for many CCGs is below the levels that would be expected, which is referred to as the “distance from target.” One reason is that the information used is historical, and another is that the finances are being allocated from a fixed pot, therefore irrespective of the formula used there is still only a finite resource to be allocated.

The financial problems within the NHS are well documented; the provider sector (excluding payers) finished the last financial year with a deficit of circa £2.4 billion—which is the highest level ever observed. The question is whether the system is inefficient or underfunded. The answer probably lies in between.

Figure 2: NHS Trusts, End-of-Year Financial Results

Source: NHS Improvement

The NHS is responding strongly to this deficit challenge by planning in a different way and seeking to integrate care on a scale that hasn’t been attempted before. There is a desire to incorporate pay-for-performance mechanisms and this is where the U.K. and U.S. systems can learn from each other. While it is not widespread, there are good examples within the United Kingdom.

U.S. Medicaid

Medicaid is a jointly funded federal/state partnership. Unlike the NHS, annual budgets vary based upon population size and utilization, although a block grant system has been proposed. When states follow federal program guidelines, they receive federal contributions somewhere between 50 percent and 75 percent of traditional Medicaid service cost (as of federal fiscal year 2017).12 This percentage is updated each year and is based on a formula that compares average state per capita income with the national average. The lower the state income average, the more federal funding it will receive as a percentage of Medicaid spending. For states that have recently expanded Medicaid per the guidance of the ACA, the federal contribution is 100 percent in the first three years following expansion but will gradually reduce to 90 percent in subsequent years.13

Medicaid’s primary funding source comes from federal and state taxation on the population, but also includes other sources such as taxes on Medicaid providers or upper payment limit (UPL) payments. Both of these mechanisms leverage federal funding by increasing the total amount paid to providers, enabling the state to collect full federal match on higher amounts, but then a portion of the reimbursement is paid back to the state general fund. In the 2016 managed care regulation, CMS has provided guidance on revising these payment structures to encourage value-based purchasing or delivery system reform.14

Payments from Medicaid enrollees is a marginal source of funding, as premiums and cost sharing are limited by federal law. Regulations do not allow premiums to be charged and limits cost sharing for traditional Medicaid beneficiaries under Title XIX of the SSA. Small premiums may be charged for expansion programs, such as the Children’s Health Insurance Program (CHIP), which covers low-income children and pregnant women at income levels above the standard Medicaid eligibility level. States are allowed to charge only marginal co-pays for outpatient services, pharmaceuticals and inpatient hospital stays. Co-pays in aggregate cannot exceed 5 percent of household income. Co-pays cannot be charged for certain services (prenatal care, emergency care or family planning services) or for certain populations (pregnant women, children, individuals receiving long-term care services or anyone with household income less than the FPL).15

It is standard, however, for Medicaid beneficiaries who require long-term care services, such as residents of custodial care nursing facilities, to contribute a significant portion of their monthly incomes toward the cost of their care.

With every budget cycle, states struggle with appropriating limited budgets to cover increasing Medicaid costs. A key similarity between the systems is that a quick internet search for any budget discussions is likely to include news stories about concerns with funding the state’s Medicaid program for the fiscal period. To address budget constraints, a state legislative session may debate reducing eligibility levels for optional populations or reducing benefits to remove optional services. Funding will fluctuate based on the size of the population covered and services provided.


For the NHS and Medicaid, government entities contract directly with medical providers on either a national or local level. Payment rates are also set by government entities, though in the United Kingdom this is done at a national level and in the United States it is performed by each state. The levels of reimbursement also differ considerably between the United States and the United Kingdom, as illustrated in Figure 3.

Figure 3: Levels of Reimbursement
Procedure NHS Tariff Medicaid (Low) Medicaid (High) Medicare Fee
Carpal tunnel surgery £865 / $1,211 £668 / $935 £1,078 / $1,509 £1,191 / $1,668
Cataract surgery £982 / $1,375 £647 / $906 £1,233 / $1,726 £1,454 / $2,036
Varicose vein surgery £1,113 / $1,558 £624 / $874 £1,224 / $1,713 £1,266 / $1,773
Prenatal, delivery and postpartum care £4,120 / $5,768 £2,600 / $3,640 £3,753 / $5,254 N/A

Notes: Exchange rate of £1:$1.40 was used for conversion (pre-Brexit rates)

Source of NHS Tariffs: https://www.england.nhs.uk/nhs-standard-contract/16-17

Source of Medicaid range of fees is an informal survey among state and health plan actuaries who work in Medicaid, representing multiple states

Source of Medicare fees is the national average from the calendar year (CY) 2015 CMS 5 Percent Sample claims database

Figure 3 is a snapshot of high-level comparative reimbursement. The two systems are too vast to give a widespread comparison. It should be noted that for the services identified in the figure, the NHS tariff covers comprehensive services related to the hospital visit for the procedure. While claim coding in the United Kingdom is easily identifiable for a bundle of services, the U.S. Medicaid and Medicare services include multiple claims or claim lines which individually identify related procedures (e.g., anesthesia, nursing care, surgery assistants, etc.). For the non-maternity U.S. fees identified, outpatient surgery claims data were pulled by first identifying physician claims for particular CPT-4 codes and then collecting all claim details for the same patient and date of service with a related diagnosis. Our intent is to provide a relevant comparison of comprehensive care for the specified procedures.


Each general hospital will typically hold two key contracts with its payers, for the provision of clinical services. One is for the provision of general services, which make up the vast majority of the portfolios that will be negotiated with local CCGs. The second is for treatments that are considered specialist in nature and are paid for at a regional or national level by NHS England.16 The contract template used is mandated nationally.

The principle is that the whole hospital sector is contracted on the same basis, using a payment mechanism that is identical, except for some fluctuation to account for differing input costs, such as salary costs in urban centers versus rural areas. There is competition in the NHS but this is based on the choice made by patients when referred to a hospital provider and is not price- or cost-based. Both NHS and private providers who hold NHS contracts can be accessed by patients, but all receive the same income for the particular service offered—the “national tariff,” which is in essence a case-rate payment. It is set annually and typically deflates each year to reflect the requirement to deliver ongoing efficiencies.

U.S. Medicaid

Unlike the NHS national tariff, each state works with local providers to develop fee schedules. Even within a state the reimbursement will likely vary from provider to provider. This is most clearly the case with safety net providers, which are local organizations that serve uninsured and other low-income populations. These providers, mostly hospitals and clinics, may receive payments for submitted claims plus other payments that are non-claims-based.17 Medicaid reimbursement is well known in the United States to be far lower than commercial or Medicare fees.

Another path that Medicaid has traveled in the expectation of improving care and reducing cost is to hire managed care organizations (MCOs) to educate Medicaid members on service use and guide better utilization practices than a fee-for-service delivery system. MCOs have been increasing their presence over the recent decades, and now over 80 percent of enrollees receive benefits through managed care.18 While federal and state dollars are paying for services, MCOs act as an intermediary contracting directly with and making payments to Medicaid providers.


Health care systems in both the United Kingdom and United States are continuously working to come up with new and innovative payment methodologies, which incentivize efficiency and align financial and clinical incentives. Some of the newly born initiatives in the process of being tested for efficacy are discussed below.


New models of care are emerging in the NHS similar to Medicaid’s MCOs, with the aim being to integrate provision, reducing barriers between health sectors and increasing efficiencies. This strategy is one of the key strands of the Five Year Forward View.19

In terms of acute provider incentives, each hospital has historically sought to maintain and grow its market share, but there are two aspects of the NHS Standard Contract that have emerged as a strong incentive to providers. The first is the requirement to comply with minimum access standards (waiting times) for treatment, with noncompliance attracting considerable fines and penalties. In some instances the penalties exceed the income for that particular intervention.

The fines deployed against providers often reaches many millions of pounds each year. There is considerable pressure in the urgent care system across the United Kingdom, with the targets most commonly breached being:

  • Percentage of emergency room (ER) attendances admitted, transferred or discharged within four hours of arrival (95 percent target)
  • Percentage of patients waiting no more than 62 days from urgent primary care physician referral to first definitive treatment for cancer
  • All handovers between ambulance and ER must take place within 15 minutes, with none waiting more than 30 minutes

The second key area is the use of value-based reimbursement metrics. For the past few years the contract has included Commissioning for Quality and Innovation metrics, referred to as “CQUIN schemes.” They provide the opportunity for providers to earn an additional 2.5 percent of their annual contract values if they meet the requirements. Some schemes are nationally mandated and others can be agreed locally.

Value-based reimbursement metrics are not confined to the hospital sector. The Quality and Outcomes Framework is a well-established mechanism in primary care to incentivize the delivery of services that improve overall health and increase efficiencies.20

Several initiatives have been made in Medicaid to achieve savings over the years, including the pharmacy rebate program, employer-sponsored insurance premium assistance, aggressive pursuit of waste, fraud, and abuse, holding fee schedules at low or flat rates each year and care management models. The most widespread savings instrument has been the shift to delivery of benefits under managed care. However, now that a majority of Medicaid beneficiaries are enrolled in managed care, states and CMS are trying to determine where to go next.

In addition to expanding eligibility criteria, the ACA also amended the SSA to establish the CMS Innovation Center. The goals of the Innovation Center are to test new payment and service delivery models, evaluate and advance best practices, and engage stakeholders to develop new test models.21 There are seven Innovation Models that can be pursued:

    • Accountable Care: Models designed to incentivize providers to redesign the care delivery model to be accountable for the coordination of care, quality outcomes and efficiency of care delivered to patients. These models also exist in the NHS.
    • Episode-based Payment Initiatives: Models where payments are made based on an episode of care, and the provider is at risk to deliver all related services within a specified time frame for a fixed amount. Again, this principle exists in the NHS but is not widespread. An example is a “year of care” tariff for some patients with long-term or chronic conditions.
    • Primary Care Transformation: Development of medical homes, which are an advanced method of offering primary care through a team-based approach and shared decision making among patients and their providers.
    • Initiatives Focused on the Medicaid and CHIP Populations: Initiatives specifically administered by the participating states.
    • Initiatives Focused on the Medicare-Medicaid Enrollees: Initiatives to integrate care for Medicare-Medicaid dual eligible beneficiaries to improve care and reduce cost. Initiatives to integrate health and social care budgets are widespread in the NHS as well.
    • Initiatives to Accelerate the Development and Testing of New Payment and Service Delivery Models: Initiatives to create partnerships with local and regional stakeholders to accelerate the testing of innovative models.
    • Initiatives to Speed the Adoption of Best Practices: Initiatives to shorten the travel time of research-proven best practices through partnerships with a variety of experts and stakeholders.22

Summary: Compare, Contrast and Outlook

Drawing the previous sections together, we can observe many similarities:

  • The overarching principles of the Triple Aim are featured in key NHS strategy documents, such as the Five Year Forward View.
  • Medical expenditures have been growing faster than the GDP.
  • Cost sharing is limited for most benefits and population groups.
  • The majority of hospital services are funded on a fee-for-service basis.
  • Funding discussions are widespread in the news and are a key platform for political debate.
  • Contracts are developed between government entities and medical providers (which may be government-owned or private sector providers).
  • Government entities are responsible for setting reimbursement amounts paid for medical services.
  • Development of innovative ways to improve quality outcomes and reduce cost are crucial to future sustainability.
  • Several model categories are currently being tested in both countries. In the United Kingdom, a range of models is being piloted in “vanguard” organizations, with the view of rolling them out across the United Kingdom. Full details can be found in the Five Year Forward View.

We also observe differences:

  • The NHS is responsible for the national population, while Medicaid is responsible for primarily low-income individuals.
  • Eligibility for services in the NHS is consistent nationally, as listed in the NHS Constitution with minor variations by some local payers, while eligibility requirements for Medicaid vary state by state.
  • The NHS covers one package of benefits for all citizens, while Medicaid has flexibility to modify benefits to include or exclude optional services, which creates varied benefits by state.
  • The NHS is appropriated a fixed lump sum by Parliament regardless of population size, while Medicaid funding may vary based on population size and individual state budgets.
  • The NHS is funded by the central government, while Medicaid is funded jointly by national and state governments.
  • The NHS sets a national tariff for medical services, while Medicaid fee schedules vary by state and provider.
  • While delivery of care through managed care integrators is relatively new with the NHS, Medicaid has been using managed care organizations for decades.

As with most health care systems, the primary goals of the NHS and Medicaid are to provide quality care that is supported by improved outcomes while at the same time providing care more efficiently. We are in the early stages of innovative payment structures that center around value-based purchasing and encourage population health management. As these initiatives develop and evidence of improved quality and efficiency are produced, we should look beyond our borders to other countries’ successes in order to capitalize on the broad effort being made globally.

One thing is for sure, there is much for both systems to learn from each other. Health is definitely an area where the special relationship between the two countries could lead to exciting developments that could benefit many millions of patients.

Chris Pallot, MSc, BA (Hons), DipM, Dip HSM, is director of Strategy & Partnerships at Northampton General Hospital in the United Kingdom.
Jennifer L. Gerstorff, FSA, MAAA, is a consulting actuary with Milliman’s Seattle health practice. She is a member of the SOA Health Council and currently leads the health council’s Medicaid subgroup.