The big squeeze

Mark Dayan of the Nuffield Trust examines the current financial issues facing the NHS and what can be done to help deliver the £22 billion in savings targeting for 2020.

The NHS faces many historic challenges over the next few years – seven-day working, a transformation of general practice, compiling and using patient data safely and with public support. But the question of money looms above them all. By the account of the Five Year Forward View, the health service must deliver £22 billion in savings by 2020. This is a level of efficiency improvement almost unprecedented in the recent history of the NHS, or indeed the private sector. It represents the projection forwards of a level of financial pressure that has already seen the NHS descend into an increasingly difficult struggle to stay within its means over the last few years.

The totemic sign of this pressure is the deficits run up by hospital trusts. Even optimistic forecasts accept that final figures for the financial year ending in April 2016 will show an overspend of £2 billion, larger than many entire government departments. By the norms of Whitehall, simply spending taxpayers’ money without permission like this is unacceptable. The Treasury has ‘locked’ £1.8 billion of bailout money for next year, accounting for most of the Sustainability and Transformation Fund intended to support the NHS in developing new ways of working and models of care. It will be held back unless financial targets are met, in an attempt to give trusts no option but to deliver savings. But the drivers that created this problem remain as intractable as ever.

A five-year backward look
How did the health service get here? The answer is a set of fairly well understood pressures, which apply not just to hospital trusts but to the system as a whole.

Four years ago, the Nuffield Trust carried out a study to estimate the future impact of factors driving costs upwards in the health service. We estimated that they would increase at around four per cent each year above inflation. This rising demand has indeed been seen, most visibly simply in the number of people needing treatment. From 2009/10 to 2014/15 referrals by GPs rose by 16 per cent; emergency admissions through A&E by 18 per cent.

Less visible, but adding to the impact of the growing and ageing population, is the increase in the severity of the average patient’s needs, which means each of these cases is likely to require more resources. Forthcoming work by the Nuffield Trust will aim to factor this into estimates of NHS demand and productivity.

Meanwhile, NHS funding has risen by only around one per cent each year on average since the study was carried out. On the ground, hospital finance directors and GP managers start each year looking at projected patient numbers and needs that basic sums tell them will be too high to be met from the pot of money they receive, unless significant cost cuts are delivered. They identify these – and many are successfully delivered – but not fast enough to keep up: across the NHS, productivity has recently improved by between 0.3 per cent and two per cent each year. A significant part of the gap has simply ended up as red ink on the balance sheet in the form of deficits.

Saved from the chop?
Last year’s Spending Review was presented as giving the NHS the £8 billion it requested in full. The Forward View, interpreted as demanding this figure, suggested that along with £22 billion savings, this would make it possible to fully close the funding gap by 2020-21. In the context of an austerity budget with large cuts to many other departments, this was a good deal for the health service.

Look more closely, though, and the settlement seems somewhat less generous. Overall funding for the Department of Health will actually rise by just £4.5 billion. In percentage terms, that is around 0.9 per cent each year – almost identical to what was received during the last parliament.

The reason that the £8 billion for ‘the NHS’ seems larger is because the NHS has been redefined to consist only of a core set of services: NHS England and the bodies it funds. This means that, although the Spending Review increased the resources of NHS England by £8 billion by 2020, it did so by cutting funds from other parts of the Department of Health budget.

This means sizeable reductions in public health spending, directed to services which aim to keep people from needing the NHS, which will be cut by at least £600 million. The capital budget that funds new NHS buildings and equipment, and the Health Education England budget for training clinicians also face cuts in real terms. We at the Nuffield Trust are concerned the overall effect of these will be to undermine attempts to make the NHS more cost effective through, for example, public health prevention and investment in new technology.

At the same time, policies around seven‑day working ask the NHS to deliver more – with case studies of weekend working showing that it comes at a significant price. The upshot is that the £22 billion in savings, already an ambitious figure, now looks more difficult to deliver and may not even be enough.

The future is tight
The literally billion‑pound question is where these savings will come from. Perhaps the most important source of efficiencies so far has been the steady improvements NHS trusts can deliver from their back offices and clinical services: more efficient rostering, better procurement, administrative cuts and mergers, and so on. For years the tariff prices paid for care have sought to bake these savings in through an ‘efficiency factor’. Averaging around four per cent over recent years, this ratcheting down of prices made trusts both absorb the costs of inflation and deliver cash reductions in the prices they were paid for providing treatments. Trusts appear to have responded by delivering a significant proportion of this – although not all, which accounts for the emergence of deficits.

Seen in this light the £5 billion in new savings identified with much fanfare by Lord Carter’s recent review is no more than business as usual for many NHS trusts. It represents an annual recurrent efficiency saving of around two per cent a year, and while meeting that target will help prevent providers’ underlying deficit getting any bigger, it will not be enough to even start to close the gap. That suggests the ‘sustainability fund’, set to deliver £1.8 billion in bailouts for 2016-17, will need to be replicated in the years that follow.

Another area which has delivered significant savings over the last five years and will now be called on again is pay. The four-year one per cent pay cap announced at last Summer’s budget, a sizeable real terms cut, could mean several billion pounds in savings compared to a future in which pay rose ahead of inflation. The crucial question is at what cost this will come in damage to morale, recruitment or the retention of staff whose skills could transfer so easily to Canada or Australia.

The potential for savings from eliminating agency staffing has been overplayed at times. It is important to remember that they will have to be replaced by permanent staff: the only savings will be from the ‘agency premium’ by which agency staff currently exceed the usual rate of pay. Even so, this might realistically deliver hundreds of millions of pounds in savings.

But none of this adds up to £22 billion by 2020 – or anywhere close.

To get to that, the NHS will need not just to deliver productivity savings to fill the gap we diagnosed four years ago, but to shrink the gap itself – by reducing the rise in demand, especially for hospital services. This is what many of the Forward View’s new models of care aim to do, whether through treating patients in scaled-up general practices instead of in hospital, or by preventing need from developing in the first place by providing better preventive care to at-risk groups like care home residents.

Yet evaluations by the Nuffield Trust and others of innumerable previous initiatives to reduce hospital admissions in a cost‑effective way show that they hardly ever bear fruit in the short term.

Changing how people work so fundamentally that it actually changes the health and behaviour of patients takes several years, time that the NHS may not have.

The ‘hard-edged’ sustainability plans currently being produced by 42 areas across England will include ambitious commitments to manage demand. Central bodies hope that if they apply enough pressure to meet these, local areas will strain every sinew and manage to deliver them.

But where the problem is that nobody actually knows how this can be done, or even if it can, effort in itself might not be enough.

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