How the NHS works

What if the NHS had to balance its books like local government?

What if NHS organisations had to balance their books each year, with no bail outs from central government? This is the reality for local authorities, which are required to spend within their means. What would it mean for health and care if NHS organisations had to do the same?

Reading time: 7 mins

Lord Kerslake

Lord Kerslake is Chair of King’s College Hospital NHS Foundation Trust and President of the Local Government Association.

My experience as chief executive of a city council and now as a chair of an NHS trust gives me a particular insight into this. Nearly 20 years ago I was offered the job of Chief Executive of Sheffield City Council. The Council was facing very severe financial difficulties after a series of well-intentioned, but ultimately very expensive initiatives to regenerate the city.

The Council was two weeks away from having to set its budget without having a clue about how it was going to deliver the £40 million savings required to achieve this. It was evident that drastic action was required. I cleared my diary for the following week and went up to Sheffield. There then followed five years of gruelling budgets to get the finances under grip. Sheffield had its own version of austerity well before it came to the rest of the country in 2010.

The reason for telling this story is to make the point that however dire Sheffield’s financial position was at that time, it was considerably better than the current financial position of many NHS hospital trusts, including my own.

First, events in Sheffield happened before the start of the financial year, giving us time to make plans to bridge the financial gap. We managed to do this because local government has a set of core financial principles it must abide by. The Council had to set its Council Tax – and therefore its budget – by early March. Second, however difficult it was, the Council – in marked contrast to NHS bodies – was, and still is, required by law under the 1972 Local Government Finance Act to set a balanced budget. Put simply, planned expenditure has to match income for the year ahead. Failure to do so would ultimately leave councillors at risk of surcharge. Third, although much lower than was ideal, the City Council had reserves it could draw on to cover unforeseen events. If it had not, the external auditors would most certainly have intervened. Finally, there was never a point when the Council was at risk of running out of cash to pay its bills.

... local government has a set of core financial principles it must abide by.

These core financial principles of local government have been tested to the limit in the past six years of austerity. Council budgets have been cut by more than a third. Given the pressure on care budgets, which make up half of local authority spending, the bulk of these cuts has fallen on back-office costs and discretionary services. In my view, local authorities have responded remarkably well to the challenge, although I think we are now approaching the limit of what is realistically possible. On top of the severe cuts imposed between 2010 and 2015, local government now faces a reduction of 78 per cent, or £7.8 billion, in its Revenue Support Grant by 2020.

Coming in to King’s College Hospital NHS Foundation Trust as Chair last year, I yearned for the same set of financial disciplines that applied in local government to be present in the health service. Of course, the circumstances are different. We have less scope to cut services and raise income. Of course, such principles would not tackle the chronic underfunding of health and care. To do this we need an independent commission to engage in a debate with the public about what kind of health care system they are willing to pay for. And of course this couldn’t be achieved overnight. We need a sensible period of transition with additional temporary funding linked to increased efficiencies. But it is a goal we should be aiming for.

Requiring NHS organisations to achieve financial balance would encourage earlier budget setting and longer-term planning.

The benefits of requiring NHS trusts to balance their books, for me, are clear. It would force the NHS to achieve a proper balance between quality, access and money. National government has to quantify the effect of new burdens and demands on local government and – at least in theory – fund them. Choices have to be made and can’t be fudged. Requiring NHS organisations to achieve financial balance would encourage earlier budget setting and longer-term planning, something that is already beginning to happen with the financial reset, but has much further to go.

There are, of course, downsides. Local government is much more likely to see service failure rather than financial failure – whereas, generally speaking, in the NHS it’s the other way round. Although social care has been protected in relative terms compared to other local authority budgets, there have been significant cuts with a very real impact on people’s lives. There have been consequential increases in delayed discharges, adding to the pressure on the NHS.

Arguably, allowing overspends even if they are unplanned at least protects services. Requiring NHS organisations to balance their books without addressing the core funding issues of the NHS risks waiting times getting longer, staffing levels being cut, or particular services that are currently available being explicitly rationed. And it might make it even harder for the NHS to meet ambitions like giving greater priority to mental health or providing seven-day services. Government may be tempted to use the tighter financial regime as a way of passing the buck on difficult service choices.

However, wouldn’t it be better though to have the debates about spending and priorities upfront rather than reactively dealt with in year with all the attendant uncertainty and pain?

The biggest benefit to the NHS would be to reduce the chronic and costly dependency that has built up in the system in recent years that seems a million miles from the original vision of foundation trusts. It is hard to find anyone who doesn’t support the move away from a ‘command-and-control’ approach to running the NHS. However, it is impossible to see how this can become a reality when significant numbers of providers are so financially dependent on their funders and regulators, to the point of monthly approvals of cash advances. In my entire five years as Permanent Secretary of Department for Communities and Local Government, we intervened in only a handful of local authorities, none for financial reasons. In the NHS, intervention has now become routine.

The biggest benefit to the NHS would be to reduce the chronic and costly dependency that has built up in the system in recent years.

Most corrosive of all is the short-term, ‘hand-to-mouth’ culture this creates. Capital investment in the NHS is relentlessly squeezed to balance the books. Local authorities are now able to borrow to invest, provided that they can assure themselves that they can meet the future financing costs on a prudent basis. This allows them to reconfigure services to both improve outcomes and reduce costs. The existence of balances, which have grown in recent years despite (or perhaps because of) the financial challenges, enables them to manage the risks.

With the advent of sustainability and transformation plans, we are moving towards area-based approaches to health and care. I applaud this move – we need stronger local system leadership and collaboration to deliver the NHS five year forward view. But it needs to be founded on much stronger and more resilient institutions. We won’t get effective partnerships without this. There also needs to be a much more open and transparent process that engages patients, staff and the public. Learning from local government and adopting its rigorous approach to budget setting and financial management is an important part of this.

What if NHS providers were able to operate within a properly funded NHS, required by law to balance their budget and hold reserves, confident about their financial future and able to properly engage with their partners on the long-term development of health and care in their area? If government set four-year funding budgets where there had been a proper debate about efficiency and priorities. Where NHS institutions were able to develop genuinely local health care plans and investment strategies with their colleagues in local government, able to make the trade-offs on local services. That would be something worth fighting for!

The views expressed in this article are those of the author and are not presented as those of The King’s Fund. We have commissioned external authors to write for ‘The NHS if’ series as a way of presenting different perspectives on the future of health and care. We welcome a diversity of views on this issue and encourage you to leave your comments below.

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‘The NHS if’ is a collection of essays published by The King’s Fund that explores hypothetical scenarios and their impact on the future of health and care.

We are asking a small number of experts – some of them members of staff at The King’s Fund and others external experts in their fields – to write short essays that consider ‘what if’ questions about health and care in England. We’ll be publishing these essays on this website throughout 2016.

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