A mountain to climb for NHS finances

Original post from The Health Foundation

‘…….by Anita Charlesworth

With the general election in full swing the NHS has been much in the news, and attention is turning to money. In the short-term NHS finances are dire – NHS providers are projecting a combined deficit of £823m this year and the underspend for commissioners is £197m. Baring last minute miracles the NHS as a whole will overspend by £626m in 2014/15. This is despite the Treasury finding an extra £250m for health at Christmas and agreeing that the NHS can shift £650m out of planned capital investment and into day-to-day running cost spending.

The main reason why the NHS is struggling is not runaway demand pressures. Despite the obvious pressures on urgent and emergency care services this winter, demand pressures over recent years have been relatively modest – hospital admissions rose by 1.9% a year between 2010/11 and 2013/14 compared with an annual rate of increase of 2.8% between 2008/09 and 2009//10.

The big driver of deteriorating finances is growing cost pressures. The last year we have full data for is 2013/14 – in that year NHS providers costs rose by £1.4bn while their income grew by £0.7bn. And the big factor pushing up costs is rising spending on staff, and most specifically temporary staff. In 2013/14 the number of temporary staff increased by 16% and spending on temporary staff rose by 27%.

The NHS is in a hole. The NHS Five Year Forward View recognises this challenge and sets out a plan to put the health service onto a more sustainable footing for the next five years. To do that, Simon Stevens and the other system leaders have called for the next government to provide additional real terms funding for the NHS of around 1.5% a year, which amounts to £8bn at the end of the decade. Alongside this the NHS would need to deliver productivity improvements and efficiency savings of £22bn – equivalent to 2-3% a year. One of the key questions for all political parties is: will they all back the Forward View and commit to the additional real terms funding of 1.5% a year for five years?

Some of the early general election coverage has raised questions about whether the NHS would need the full £8bn, or whether it could deliver great productivity savings. Our new analysis of hospital finances and productivity is a stark reminder of the herculean effort that will be needed to find efficiency savings and productivity improvements on the scale required if funding growth is to be kept to £8bn.

We have estimated the crude productivity (outputs/inputs with no adjustment for quality gain) for acute and specialist hospital care and the rate of efficiency improvement. Our analysis shows that between 2009/10 and 2013/14 efficiency improved by an average of just 0.4% a year. The chart below shows the picture for productivity. After increasing in the first two years of the current parliament, crude productivity fell by almost 1% a year in both 2012/13 and 2013/14.

Our analysis is a testament of just how stretching a challenge the health service would be set if the NHS were to see funding increase by 1.5% a year, receiving an additional £8bn above inflation by the end of the decade. It reinforces the point that we and others have made that £8bn is the minimum the NHS will need to maintain – let alone improve – the quality of health care. £8bn is not the starting point for a negotiation. But it also reaffirms what NHS leaders have been saying for some time – that the current approach to meeting the financial challenge has run its course (see Chris Hopson’s excellent piece in the HSJ). Pay restraint combined with administrative cost cuts and tariff reductions worked for a year or two but they represent a series of short-term tactics. What is needed now is system-wide change to deliver sustainable productivity improvement in hospitals and beyond.

To do this the NHS needs the programme of transformative change signalled in the Forward View. It will need one-off transformation funding to support change. But in addition to service redesign the NHS needs a targeted strategy to improve productivity – this must include concerted action on recruitment and retention of permanent staff to deal with the ballooning temporary staff budget. And this is one area where what is good for NHS finances is also almost certainly good for quality. But alongside this we need a seriously thought through productivity plan for the NHS which recognises not just the need for short-term changes, but to build skills and approaches which sustain the NHS well beyond that.

The paradox is, as Repenning and Sternman observed 15 years ago, time spent on improvement often results in an immediate dip in performance but is sustained in the medium to long term, as successful businesses know. That trade-off is unpalatable in the NHS, but perhaps the right time to face it is immediately after the election.

Anita is Chief Economist at the Health Foundation.  ………’

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