Is the NHS heading for financial crisis?

The King's Fund verdict is our take on the big questions in health and social care. Here we take a look at whether the NHS really is heading for a financial crisis.

The issue in a nutshell

The coalition government met its commitment to increase NHS funding in real terms over the course of the parliament, although this was less than the growth required to meet demand. Combined with significant cuts in social care services, sustained financial constraints have meant that services have come under growing pressure, and increasing numbers of NHS providers are in deficit.

Tight control over pay and prices together with cuts in management costs meant that NHS performance held up well for the first three years of the parliament. But both performance and financial control have since declined, in part because of the costs of employing additional nursing staff to address concerns about the quality of care.

What happened?

Although the government fulfilled its NHS funding commitment with funding increasing by an average of 0.8 per cent per year in real terms the increases it delivered were less than the estimated growth of 3 to 4 per cent per year required to meet higher costs of new medical technologies and increases in demand for health care. Over the same period local government has seen a real reduction in spending on adult social care of 12 per cent.

The NHS coped well with the squeeze on its funding during the first three years of the parliament, using a variety of levers such as reductions in the tariff that providers receive for some services, a pay freeze and cuts in management costs. However, in the past two years it has become clear that the pressures are really beginning to bite. Taken together, NHS trusts and foundation trusts are forecasting an end-of-year deficit of more than £800 million. The scale of the financial deficit is not explained simply by the increasing number of trusts in deficits, but also by the increasing size of deficit at each of these providers.

The annual reduction in tariff prices was estimated to have had the potential to generate more than £2 billion of productivity gains each year between 2011/12 and 2014/15. The latest proposal for a reduction in tariff prices for 2015/16 was rejected by providers delivering the majority of NHS care. A revised offer, while accepted by many trusts, has still been rejected by some of the largest hospitals in England, suggesting the cumulative impact of the reductions in price have reached their limit.

A national pay freeze for all but the lowest paid NHS staff reduced costs by an estimated £1.7 billion between 2010/11 and 2012/13 but a revised pay offer for staff in 2015/16 has signalled the end of the pay freeze. In the past trusts might have tried to reduce staff numbers in times of financial stress, but since the publication of three reports into patient safety (Francis, Keogh and Berwick) they have increased their staffing levels – particularly for nursing. With shortages of clinical staff across the NHS, providers have often recruited expensive agency staff and this has added to financial pressures.

NHS Providers puts the combined cost of unfunded staffing changes recommended by Francis, by Care Quality Commission inspections and by new NICE guidance at £1 billion. In the 2010 Spending Review the government pledged to reduce management costs by one-third in real terms. Figures from the Department of Health accounts for 2013/14 suggest that administration costs decreased from a baseline of £4.5 billion to £3.04 billion in 2013/14 – a reduction of 33 per cent in cash terms and around 36 per cent in real terms.

The transfer of some NHS funds to the Better Care Fund to support social care and health and social care integration has further added to the pressures faced by the health service. The Better Care Fund comprises a £5.3 billion pooled budget in 2015/16 including at least £3.46 billion from the NHS, most of which will come from existing budgets – a significant increase and one that will have an opportunity cost for the NHS. There are some conditions attached to the money to help manage the impact on NHS services, with £1 billon to be allocated to health and wellbeing boards dependent on local performance in reducing hospital admissions and any remaining money to be used to commission NHS services.

The King’s Fund verdict

The NHS managed to withstand the financial pressure for the first three years of this parliament, but it is now under increasing strain. Many NHS organisations are reporting that they have ‘come to the end of the track’ in being able to reduce costs using traditional measures. Many large NHS organisations seen as financially stable and effective at managing their resources are now in deficit. Foundation trusts with financial reserves are able to draw on these to deal with deficits in the short term but by definition this is not a sustainable solution to the NHS’s funding problems.

The increasing number of providers in deficit is symptomatic of the mounting difficulties that trusts face in realising cost savings and assuring quality standards (through increasing nurse staffing, for example) in the wake of the Francis Inquiry. The government has found additional funding in 2014/15 – some new, most reallocated from within existing budgets – to support direct patient care. It has also announced plans to increase the frontline NHS budget by more than £3 billion in cash terms in 2015/16 with some of the increase earmarked for service transformation.

In the NHS five year forward view, NHS England argued that the NHS could deliver productivity improvements of £22 billion but would require £8 billion a year of additional funding by 2020/21. Most independent commentators suggest that delivering productivity improvements on the scale suggested will be a very tall order and that £8 billion is therefore the bare minimum that will be required. As yet it is unclear whether all three of the main political parties will commit to provide this level of funding.

While there is undoubtedly scope to deliver further productivity improvements, for example by tackling variations in performance between NHS providers, better procurement of goods and services, and greater integration of care, these will take time to deliver savings. Also, the NHS needs to be able to access funds to invest in new models of care before resources can be released from existing services. In the absence of an adequately resourced transformation fund, it will be extremely difficult to do more than prop up existing services in the short term.

The next government will inherit an NHS that faces growing pressures on all fronts. It will need to act quickly to ensure that there is sufficient funding to sustain as well as transform services in the next parliament. The NHS is working at or very close to its limits and patient care will suffer unless more resources are found.

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