Deficits and lower funding: the good news

Niall Dickson

An article by Niall Dickson from The King's Fund's Insight magazine, arguing that the current financial pressures on the NHS could be more of an opportunity than a threat.

Publication:  Insight
Reference:  The King's Fund bi-monthly update, February 2007

The NHS is facing crunch time as financial year-end approaches and trusts rush to balance books, but The King's Fund chief executive Niall Dickson argues that current financial pressures – plus lower funding increases expected in the forthcoming comprehensive spending review – could be more of an opportunity than a threat. To survive and prosper, the NHS has to get to grips with the underlying causes of deficits – and the time is right to do that now.

There is a terrible feeling of déjà vu at the moment. As the NHS approaches the financial year-end it is hard to find a single organisation that is not having to resurrect some of the desperate tactics last deployed in the 1990s to rein in spending.

Delaying payment to creditors, letting waiting times grow and refusing to pay for treatment for conditions such as varicose veins used to be hardy perennials at this time of year. And when there was a clamp-down on providing biscuits at meetings you knew there was trouble.

Now this unedifying start-stop routine is back as the service desperately seeks to avoid going into the red. Last year’s net deficit of more than £0.5 billion caused ministers major embarrassment and hastened the departure of the then chief executive Sir Nigel (now Lord) Crisp.

All eyes are on the Health Secretary to see whether she can deliver her guarantee that the NHS will be back in balance this year.

The Department of Health is quietly confident that this can be achieved but it will come at a cost. The last quarterly financial performance report halfway through the year claimed the NHS was 'on track to deliver net financial balance'. Nevertheless, the gross deficit then being forecast was £1.2 billion – much the same as last year's outturn.

The difference now, of course, is that all NHS organisations have been top-sliced to allow the Department to offset as much of the gross deficit as possible.

How this all arose during a period when more money than ever was pouring in has been widely debated; it is now accepted that, although the centre must take its share of the blame, the NHS financial regime did need to be tightened, not least as it embraced new forms of reimbursement, choice and more provider autonomy.

Further challenges lie ahead as the growth in funding comes to an end in 2008. We are likely to see cash increases for the NHS in the forthcoming comprehensive spending review of between 3 and 3.5 per cent per year in real terms up to 2011 – less than half the annual increase since 2000.

There are rumours that social care may fare even more badly; this is bad news for social care but also bad news for health services who will be forced to deal with the consequences of cash-strapped local authorities being unable to cope with the rising number of elderly people, many with dementia, needing home and residential care.

Faced with all this, it is becoming ever more clear that if the NHS is going to survive and prosper it will need to get to grips with the underlying causes of the financial deficits, tackle productivity, and deal with the widespread and often unexplained variations in performance. For some organisations this will also demand a very different approach to delivery.

These were among the key messages that emerged from a high-level summit the Fund held last year at Leeds Castle, which was attended by officials, NHS managers, health professionals, economists and leading policy analysts. The summit report, Funding Health Care: 2008 and beyond, which we are publishing next week, reveals a consensus that the slow-down in funding from next year need not damage patient care or prevent the delivery of better services. But it does conclude that this is dependent on meeting the challenge of higher productivity and on planning now for an era of reduced investment.

As we enter this new phase it seems an appropriate moment to reflect on what has been achieved and where we need to go from here.

To this end we have commissioned Sir Derek Wanless to revisit his 2002 report for the Treasury, which precipitated the huge investment of the last few years. He and his team at the Fund will review the progress that has been achieved on his original recommendations for the Chancellor.

As the Leeds Castle report makes clear, there are reasons to be optimistic about the sustainability of the NHS and there is a strong political consensus behind our tax-funded system.

But this should not be taken for granted and unless the service can demonstrate real gains for additional investment over the next 10 years together with much greater responsiveness the funding system established in 1948 will be challenged again.