Poverty among riches

Since 2002 the UK’s National Health Service (NHS) has benefited from one of the most sustained periods of increased funding since its foundation. In cash terms the budget for this financial year is over 50% higher than that for 2002/03. And yet many NHS bodies are having to make significant cuts to their budgets with the associated threat of job losses and even redundancies. Why is this?

The overall NHS deficit is negligible, its gross net debt for the last financial year was the equivalent of a person earning £20,000 having an unpaid Visa bill of £380, but also having £230 in the bank. The real financial problems are at the level of the 600 or so organisations which now make up the NHS.

The main reason for the financial distress of a number of these bodies would appear to be changes of emphasis by the Government. Up until recently, the main priority was to reduce waiting lists and balancing the books was considered to be much less important. So much of the additional funding is being used to address the Government’s priorities of reducing waiting lists rather than dealing with its underlying structural problems. In addition, the NHS is having to introduce Payment by Results (effectively the re-introduction of the internal market) without being provided with the necessary financial resources. This is happening in an environment where the NHS had suffered very heavy financial constraints for decades, and other reforms such as patient choice, use of private sector providers and the private finance initiative (PFI) are also having a detrimental effect on the finances of individual NHS bodies. Finally, although the Government has allocated significant additional resources to the NHS, the levels of spending are still well below those of other industrial countries.

Stringent priority

The Government’s over-riding priority for the NHS since 1997 has been to achieve its targets for reducing waiting times. This is clearly expensive, but now the requirement for financial stringency has moved up the priority list. The Audit Commission has noted ‘the view that exists in some NHS bodies that Central Government targets are in direct competition with the achievement of financial balance’. However, the Government’s own guidance, issued in 1999, made it clear that, for hospital trusts, the three-year breakeven period could be extended if the actions needed to make good a deficit that might ‘seriously threaten the achievement of national performance targets’ and lead to ‘unacceptable service consequences’ (DoH Circular HSC 1999/146).

Until the 2004/05 financial year, deficits were smoothed over by transfers from capital budgets to those organisations in deficit and other mechanisms. The NHS actually overspent its revenue budget by around £300m in each of the last five years before capital to revenue and other ‘adjustments’ were made. The logic of the re-introduction of a market for health services has meant that the financial position of each NHS body has to be laid bare to ensure that financial incentives can operate.

In addition, no allowance has been given for the costs of introducing Payment by Results. The costs of NHS administration during the 1980s were estimated at 5% of its total costs. By 1997, with the introduction of the internal market, these had increased to an estimated 12% of its budget and some allowance had been made for these costs. For at least a couple of years in the early 1990s the NHS did receive real increases in its budget. The incoming Labour Government expected to save an estimated £1bn when it scrapped the internal market and annual contracting in 1997. Despite this, there is an assumption that trusts can make savings on undertaking health procedures of an average of 2.5% this year. As a British Medical Association spokesperson said recently, ‘The pursuit of market-based healthcare has diverted too much of the welcome extra funding down an expensive blind alley’.

Financial stringency is a necessary pre-condition for the Government’s ‘modernisation’ of the NHS and the expected efficiency gains. However, the other side of the coin of private sector style efficiency is insolvency and bankruptcy. Thus, it is estimated that this year there will be 13,000 corporate insolvencies and 100,000 personal insolvencies. It is still debatable whether any NHS organisations will actually be allowed to go to the wall, but the current round of announced and threatened job losses and redundancies is the logical precursor.

To make matters worse, NHS bodies are having to face up to this competition and financial pressure after years of financial stringency. According to the NHS Consortium, in the 1980s and particularly the 1990s, ‘the NHS had very tight financial settlements’ with budget increases half of that needed to meet increased life expectancy and improvements in health technology. Frequently, its budgets grew at a lower rate than healthcare cost inflation. In his 2002 report, Sir Derek Wanless estimated that cumulative under-spend between 1972 and 1998 was £220bn (at 1998 prices). This is not much less than three times the total of last year’s NHS budget for England.

Uncertainty

Patient choice will have the effect of increasing financial uncertainty and further de-stabilising local health economies. In addition, for many trusts, PFI and LIFT (the equivalent for primary care trusts) have significantly increased costs and inevitably reduced the options which are available if financial cuts are considered necessary. A sample of eight PFI hospitals showed that their capital costs had increased from 4.5% to 16% of their budget. Half of the deficit of nearly £20m at the Queen Elizabeth Hospital in Greenwich is due to the costs of its PFI scheme.

Since the mid-1960s the UK has been spending less on healthcare (as a proportion of its gross domestic product or per person) than the EU average. The gap widened in the mid-1970s, and again in the 1980s. The Government has promised to provide the European level of funding for health services, but it still has some way to go to achieve this target. According to the latest comparable figures available from the Organisation for Economic Cooperation and Development, in 2004 the UK spent 8.3% of its GDP on health compared with over 10% in both Germany and France, and over 15% in the US. This explains the conflicts over the use of certain procedures by the NHS. Faced with a similar health environment, and with the availability of the same technology, the UK health service cannot afford to provide a level of care comparable with that provided in other countries.

The Audit Commission’s recent recommendations to avoid NHS deficits in the future have concentrated on the quality of financial management in individual trusts. But the widespread deficits cannot all be due to a sudden general deterioration in the business acumen of NHS managers. In addition, the increased priority given to financial balance and the avoidance of deficits has meant that many trusts are facing significant cuts in their budgets with little or no notice. Thus, in London, primary care trusts had their budgets for this year reduced by 3% in March and, a third of the way through this financial year, significant budget reductions were announced – for example, for a number of trusts in East London. Newham and neighbouring Tower Hamlets are being required to save around £2.5m, City and Hackney going on for £5m, and Barking and Dagenham nearly £7m.

The Government has promised, and delivered, significant increases in funding for the NHS, but this level of generosity is not set to extend beyond the next financial year. In addition, the increased level of funding has yet to enable the fundamental underlying problems of decades of financial constraints to be addressed. Unless the current wave of reforms delivers significant productivity gains, and there is little clear evidence that it will, the NHS will still be faced with the task of providing comparable levels of heath services with lower effective levels of resources than many other countries.

Andy Wynne is ACCA’s head of public sector technical issues.