NHS: The elephant in the public spending room

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.

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This is more or less in line with what the ONS figures showed for the wider NHS earlier this year. (See previous post.)

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.

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Those early years saw NHS productivity increase at a faster rate than anything seen in the last couple of decades.

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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.

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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.

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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
in productivity.

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.

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10 Responses to NHS: The elephant in the public spending room

  1. Brendan says:

    Doesn’t taking on temporary staff suggest a some level of poor management here?

    Maybe all those bureaucrats that politicians like to boast they’ve fired actually did something useful!

    Side note:

    “Few would argue that having more nurses is a Good Thing…”

    I think that’s probably a typo, unless you have strong opinions about nurses that aren’t apparent.

  2. John says:

    Everything you say about the economics is correct but there is one additional dimension few people seem to be aware of. When the coalition government promoted the idea of hospitals becoming foundation trusts, they also specified that they had to balance their books to gain foundation trust status. One way in which hospitals were able to achieve this was to reduce the numbers of directly employed nurses and to instead employ agency nursing and others staffs.
    In the short-term, this made it possible to balance their books but it also meant that fewer nurses from the training hospitals and universities were apparently required so the training institutions reduced the numbers of trainee nurse places on their courses, with the result that fewer trained nurses were available to replace those retiring or opting to work full-time as agency nurses.
    This meant that hospitals then had to recruit new nurses from overseas – from Europe and other parts of the world. It also meant that they were forced to employ more agency nurses and other staff through private agencies, which led to the ballooning in staffing costs you have identified.
    The truth is that all the Lansdale and other changes have led to an unholy mess in terms of staffing and other costs. My local district general hospital went from a position of breaking even to having a running deficit in excess of £10 million as a result. It also means that their plans to apply for foundation trust status have now had to be put on hold indefinitely.
    Overall, all these changes have been disastrous for the NHS and the knock-on effects look likely to continue reverberating for many years to come.
    As Stan said to Ollie “This is another fine mess you’ve landed us in”!!

  3. Richard says:

    Perhaps it is time that there was a charge for dealing with the NHS.

  4. Hugo Evans says:

    The shortage of medical staff, whether as a result of perverse incentives in trusts or poor training capacity planning, have effects that radiate out beyond the NHS. The cyare home sector is in competition for NHS nurses and many are becoming desperate to maintain their statutory staffing ratios. Many have no choice but to try to recruit abroad. These extra social care costs are met in part by local councils. For the full picture we need to factor those into the NHS picture.

    • John says:

      You raise a highly salient point, especially as the government of any party or coalition of parties are increasingly linking together the health and social care sectors. Maybe in future we will get a much clearer idea as to the combined costs of both sectors.

  5. metatone says:

    Part of the issue here relates to recent posts from Brad DeLong – we’re worrying about the cost of things provided by the nation to the population and persistently underestimating the benefits.

    I’ll note that if you really want productivity increases, it’s necessary to invest in them – and do so up front. Cutting waste is an inherently self-limitng activity. Increasing productivity involves innovation and reconfiguration – and all of that has up-front costs. Until we’re able to admit that, we’re unlikely to get close to improving productivity.

    • JohnR says:

      You should also note that changes in equipment costs….such as using safer sharps, costs more, sharps with shields to cover them after use are more expensive than basic needles,
      Productivity saving is rampant: such as having patients self-administer IV treatment, themselves, at home.
      Other savings are made, for instance, by making once-routine operations considerably more rare than 10 years ago (loads less spinal ops for herniated discs) and joint replacement, while slowly climbing, are no longer done routinely (which cuts down on patients ceasing to live while having treatment…always a risk in hospital, especially older patients)
      Cutting prescribing costs by writing scripts for cheaper alternatives is rampant, even if the prescribed meds are less effective. And with the HSCRA, free prescriptions are no longer paid for by the DoH but by the local commissioning group. the results of this are that hospital admissions for sepsis, due to primary care prescribing less antibiotics, are climbing. Robbing Peter, to pay Paul.

  6. Aidan Ward says:

    There is a huge problem with this analysis. The NHS provides care in ways that have grown up over the years. It also determines the apparent need for its services. It has a vested interest in that need being seen to grow and be largely non-negotiable. There is, and can be no independent vantage point from where the efficiency of the the NHS in delivering care can be seen: hence the proliferation of comparisons.
    There are, however, some interesting pointers. Just about everyone is aware of Buurtzorg and how much money was saved while quality of care soared. Embarrassing: when you simply do the job, the costs go down not up. There are home grown examples too: I studied community care in Monmouthshire with similar conclusions. There are examples from within an Acute setting but they are more complicated to rehearse. The net result is that it seems that if you actually provide the value that all that productivity is supposed to lead to, then service demand can drop considerably.
    The next embarassment is that of course service demand doesn’t drop simply in existing silos. In the current climate it is very difficult to find political support for saving costs on someone else’s budget. We have seen classic examples of this across health and social care boundaries.
    So my best intuition is that the figures are garbage: oh, and I have experienced people’s apoplexy when I say that. As a metaphor consider the government’s energy policy which provided my elderly next door neighbour with loft insulation. The problem? The installers put the insulation in the lost without unrolling it or even taking it out of the packing.
    Let’s not pretend we can do health economics from supply side data, especially when the supply side is politically rigid. The best estimate I have seen for how much of the effort applied in the NHS goes into value producing activities is about 20%. We need to change the management model and it is undiscussable. This article shows how much that can cost!

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