The wheels are coming off the NHS’s finances

While this week’s Budget contained no new announcements on health spending, it shone a harsh light on just how tough the financial challenge is proving for the English NHS.

Data from the Office for Budget Responsibility shows how government spending on the English NHS, as a share of UK GDP, is falling – it dropped from 6.5 per cent of GDP at the end of the last decade to 6.2 per cent for 2015–16. Health spending as a proportion of GDP last fell in the late 1990s and before that in the late 1970s – in both cases to be followed by major programmes of reform.

‘There is now a serious chance the NHS will hit the financial buffers before and not after the next election’

It looks like this is starting to bite. HSJ reports that for the current financial year the Department of Health expects to spend pretty much all of the health resource allocation for 2013-14. This is in contrast to the first few years of austerity when the health budget was underspent – with £826m in 2011-12 and £1.5bn in 2012-13 left at the end of the year. 

While the NHS’ long-term financial challenges are well known, the presence of annual surpluses in recent years suggested it was coping with the short-term pressures. But, unless the DH finds quite a bit of cash stuck down the sofa at the end of the year, 2013-14 will signal a marked deterioration in its finances. 

Looking beneath these very high-level numbers it is clear that times are getting very tough. There are two key services where the pressure is clear to see: acute hospitals (both foundation and non-foundation trusts) and specialised services (like chemotherapy and cystic fibrosis care) commissioned by NHS England.

The latest data from Monitor and the NHS Trust Development Authority shows that, at the turn of the year, almost half of all acute hospitals were in deficit, while specialised services, according to their March board reports, have overspent by £366m (3.8 per cent) in the first nine months of the year.

Increasing pressure

The pressure on hospital trusts is worrying and the outlook for acute services over the next few years is even worse.  As the planning guidance issued by Monitor shows, the affordability challenge rises to an eye watering 6.6 per cent in the financial year 2015–16. Much, if not most, of this will fall on hospitals that will have to make large savings as the government’s Better Care Fund seeks to transfer resources for urgent and emergency care to social care budgets. These trusts will also face rising employer pension contributions.

‘The pressure on hospital trusts is worrying and the outlook for acute services over the next few years is even worse’

Savings on the required scale are unrealistic over such a short period, and there is no real plan for how to implement changes of this magnitude. What’s more, this is happening against the backdrop of rapidly increasing cost pressures from additional nurse recruitment since the autumn in response to concerns about standards of patient care. 

Between September and November alone the NHS employed 4,500 additional full-time equivalent nurses for acute and–older people’s care – a 3 per cent increase over nursing staff levels at the start of 2013-14. 

Monitor’s planning guidance makes no attempt to hide the gap. It suggests that after hospitals have improved their efficiency, and clinical commissioning groups and others have realised some system-wide efficiencies, there is still 2.1 per cent of the budget – around £2bn – for which there is no clear source.

Bleak outlook

The outlook for specialised commissioning is no more encouraging. NHS England’s estimate of the funding gap to 2021-22 shows cost pressures for these services growing at 10 per cent a year compared with overall health demands, which are increasing at 4 per cent. Again, plans to manage this are in their infancy.

‘Even if the NHS continues to raise its game on waste and inefficiency, we have a rapidly looming funding problem’

There are numerous everyday examples of waste and inefficiency in the NHS, and studies find many patients in hospital could potentially be treated elsewhere. New research from York University points to significant variations in productivity across the service – bringing all hospitals up to the average standard could deliver important savings. But, the unpalatable truth is that, even if the NHS continues to raise its game on waste and inefficiency, we have a rapidly looming funding problem that is simply too big and too prolonged to be bridged by productivity improvements alone.  

By international standards, England doesn’t have a very expensive health service. The hospital sector is small, it is run very ‘hot’ with bed occupancy high, and there are average-to-low numbers of doctors and nurses per head. 

Average productivity gains over the last few years have already been pretty strong at just over 2 per cent for 2010–11 and 2011–12. Compared with the rest of the economy, this is not bad at all.  

With productivity unable to fill the financial gap, the NHS has been coping by living off some big one-off savings: wage restraint, administrative cost reductions and falling drug costs for GP prescribing. As the Commons health committee recently highlighted, progress in making the transformative change so widely trumpeted as a possible answer has been slow. Hospitals are finding it increasingly difficult to identify and deliver their cost improvement programmes.

In the end, if we want to maintain the current NHS with a growing and ageing population, and tackle concerns about quality, we will have to pay for it one day. It looks increasingly like that day will come sooner rather than later. 

There is now a serious chance the NHS will hit the financial buffers before and not after the next election. Even if it limps on, there can be little doubt that the position for 2015-16 is not sustainable. Watch this space.

Anita Charlesworth is chief economist at the Nuffield Trust