Yesterday’s FT headline announced that the NHS has a bigger hole in its finances than we thought because it hasn’t made the efficiency savings the politicians were banking on.
The National Health Service is facing an even bigger financial “black hole” than politicians and health leaders have acknowledged, following a sharp fall in productivity revealed in an analysis of official data for the Financial Times.
The research, carried out by the Health Foundation, an independent think-tank, shows that despite an inflation-protected budget, hospital productivity tumbled from 2012 as the NHS prepared for, then implemented, a contentious structural shake-up that stripped out layers of management and handed budget control to clinicians.
The Health Foundation report shows that, after an initial increase in hospital productivity in the early years of the Coalition, it then fell again in subsequent years.
A report from the King’s Fund last month showed that the Coalition made more cuts to NHS budgets than it initially planned in its early years, only to increase spending again towards the end of its period in office.
Those early years saw NHS productivity increase at a faster rate than anything seen in the last couple of decades.
This isn’t really surprising. In an organisation that has had regular budget increases for years, it is relatively easy to spot some quick efficiency savings. The NHS, whose workers thrive on dealing with emergencies, proved to be good at finding emergency cost savings.
The difficult part of any attempt to improve productivity is sustaining the momentum in the second and third year, once the quick wins have all been spotted. In many organisations, public and private, the energy and enthusiasm starts to run out.
At the same time, the health service had to deal with a reorganisation which was massive even by previous NHS standards. It will be some time before the full cost of the Lansley reforms is assessed but restructures always divert attention away from the day-to-day. When jobs are under threat and new ones are up for grabs, people focus on positioning themselves and securing their future. That’s the same in any organisation. An earlier King’s Fund report remarked that the first part of the last parliament was taken up with understanding and implementing the reforms while the second part was taken up with limiting their damage.
As if that wasn’t enough, the NHS found itself facing rising staff costs. Was that because it breached its pay freeze? No such luck, might be the response of some NHS staff. In fact, although permanent staffing levels increased slightly, the amount spent on permanent staff fell in the year to March 2014. The rise in costs is accounted for by the extra £1 billion spent on temporary staff.
The Health Foundation comments:
[I]t is clear that the service is under significant strain and the finances of NHS hospitals have deteriorated very rapidly.
The reasons for this are very clear from our analysis. Hospital operating costs have been growing at a faster rate than their income. The key driver of rising operating costs is staff costs and, in particular, the rapid rise in spending on temporary staff. One outcome of Sir Robert Francis’s report on the scandal of poor care standards at Mid Staffordshire has been a sharp rise in the number of nurses employed in hospitals. This has increased the unit cost of providing an episode of care.
Few would argue that having more nurses is not a Good Thing but it comes at a price.
If anyone is in any doubt about the importance of all this, take a quick look at the OBR’s long-term spending projections. I said last week that the deficit was a productivity thing and nowhere is that more true than in the health service.
According to the OBR’s forecasts, an NHS productivity increase of 2.2 percent per year would keep health spending at a constant proportion of GDP for the near future. Anything less would see health costs increase faster than the economy grows, meaning that health spending would take up an ever larger slice of our national income and our tax revenues.
Michael O’Connor has helpfully put the OBR’s low NHS productivity scenario, an annual 1 percent increase, on a chart with some of the other variables it considers.
Low heath care productivity growth will have a far greater impact on the public deficit than immigration or demographics. You wouldn’t think so from the amount of media coverage though.
As this Health Foundation projection shows, even the recent average productivity growth of 1.5 percent per year would see health spending needing to rise at 2.9 percent per year, so more than forecast GDP growth, or else a big funding gap opening up by the end of the next decade.
It is, though, very unlikely that the NHS can sustain annual productivity increases of 2.2 percent over a long period. It has never come anywhere near that in the past. The Health Foundation concludes:
Our analysis of the efficiency and productivity performance of the NHS over recent years suggests that this will be a very substantial challenge.
[W]hile it is relatively easy to identify the opportunity, our analysis confirms that the NHS – like most health care systems – has struggled to make progress on tackling variation
If NHS productivity matched the estimate of the whole-economy trend rate of productivity growth (2.2% a year), public spending on health as a share of GDP could remain broadly constant and meet projected pressures. However, there is no evidence that productivity at this rate could be sustained in the medium term.
Long-term productivity improvements of more than 2.2 percent across entire service sectors are rare (see Table B of this Bank of England report). KPMG reckoned that private service sector productivity in the UK only increased by 2 percent per year in the decade before the recession.
Annual productivity increases are a big ask. We are not talking about 2.2 percent next year or even for the next five. To stop health spending outstripping GDP would require productivity increases at that level every year for the next fifteen and probably beyond. The occasional heroic 3.5 percent wouldn’t do it if it then fell back to below 1 percent the next year.
Next to pensions, the NHS is the largest proportion of public spending and the biggest chunk of public service spending by a long way. What happens in the NHS is therefore far more significant for the public finances than immigration, unemployment benefits or any of the other subjects that get a lot more air time.
Based on past performance and the pressures facing the NHS, it’s difficult to see it making productivity improvements of more than 1.5 percent per year over the next decade or so, which means it will either take up an ever greater share of tax revenues or it will have to stop doing so much for free.
At the moment, though, politicians are keeping quiet about this. They make glib statements about productivity improvements and talk about the increasing NHS deficits as though they are a temporary problem brought on by something the other lot did. What sort of health service we want and how much we are prepared to pay for it is one of the most important decisions we need to make in the next five years. Going by the level of discussion in the election campaign, though, you wouldn’t know it.