From the TUC

Mind the gap – has George Osborne got a plan for funding the NHS?

16 Dec 2014, by in Public services

One of the big ticket items coming out of the Chancellor’s Autumn Statement was additional funding for the NHS. £2bn extra for 2015/16 and a new £300m a year fund for kick-starting GP innovation, derived from fines imposed on the banks’ shady foreign exchange dealings.

There was plenty of scepticism around the Chancellor’s claims that this was all new money. But with George Osborne hailing this as a “down payment” on the future of the NHS, the important consideration is the extent to which this begins to tackle the growing financial crisis facing the NHS.

With the NHS facing a perfect storm of flat spending, rising demand, increasing costs of healthcare provision and “heroic” efficiency targets, all coming at a time of enormous upheaval, those arguing that this funding represents little more than a sticking plaster may be closer to the mark.

First, let us be clear. The NHS is facing a profound funding crisis, the scale and nature of which is unlike anything previously seen. Last year, a quarter of NHS providers ended the year in deficit. The situation has significantly worsened since then, with the Kings Fund reporting that 60 per cent of hospitals are currently in deficit, indicating that financial stress has spread well beyond the minority of hospitals with a track record of struggling to balance the books.

The figures among providers are seriously troubling. Monitor report that in the first half of the current financial year, foundation trusts have an accumulated deficit of £254m, with twice as many reporting deficits than at the end of 2013/14. The NHS Trust Development Agency report a similarly grim picture of NHS trusts, with an aggregate deficit of £376m up to September this year and a quarter of trusts forecasting end of year deficits.

While the picture is slightly better on the commissioning side, with NHS England forecasting a surplus, it is highly unlikely that this will be enough to cover the problems faced by the provider side and therefore achieve an overall balance for the health service. Commissioners themselves don’t sound too confident, a survey of CCGs by the Health Service Journal (HSJ) in September found that over 60 per cent thought it unlikely that their local health economy would be in overall financial balance by the end of 2015/16.

And not all of the problems are on the provider side. Around a third of those CCGs surveyed stated that they were not confident of sticking to budget without compromising care quality in the next 12 months. Northern, Eastern and Western (NEW) Devon CCG is a commissioning body with an income of £1.1bn, they are forecasting a deficit of £43m this year, £14.5m more than they had planned for.

Most worryingly for all, endemic financial stress across the system is leading to a deterioration of outcomes for patients. Key performance indicators are starting to slip. Waiting times for hospital treatments are at their highest since 2008, the target that 90 per cent of inpatients should be treated within 18 weeks has been missed for the last four consecutive months and A&E waits are the highest level for a decade. Waiting time targets for diagnostics and cancer treatment are being missed and the number of delayed transfers of care, unnecessarily prolonged hospital stays, is 17.5 per cent higher than this time last year.

No wonder then that the Chancellor was forced to find money to plug the gaps in 2015/16. But as the RCN point out, other attempts this year to fix short term problems with emergency funding, such as the winter funding, have failed to make much impact.

What has caused this situation? After all, wasn’t the NHS one of the few parts of the public sector ‘protected’ from the Chancellor’s axe?  Ultimately, the NHS is faced with a perfect storm of flat budgets, rising demand, escalating costs and a huge efficiency squeeze, all at a time of monumental change within the sector.

First and foremost, this is a problem of under-funding. Despite David Cameron’s assurances that NHS spending is safe in his hands, the health service has been faced with an unprecedented funding squeeze. Even when we factor in the additional money announced in the Autumn Statement, spending has increased in real terms by around 0.9 per cent a year since 2010.  But the Nuffield Trust estimates that cost pressures in the NHS are growing at around 4 per cent a year, as a result of an ageing population, growing in size and experiencing more chronic disease combined with increased costs of providing healthcare, including staffing, drugs and technology.

This is leading to a significant and growing funding shortfall. This was set out clearly by Simon Stevens in the NHS Five Year Forward View. According to NHS England:

A combination of growing demand if met by no further annual efficiencies and flat real terms funding would produce a mismatch between resources and patient needs of nearly £30bn a year by 2020/21

This situation is exacerbated by additional factors impacting on NHS providers, such as PFI legacy costs, with many trusts spending over 15 per cent on estate costs linked to PFI debts. Additional stress for providers, in the short run at least, has also come about through the transfer of £2bn funding out of the acute sector to local authorities, to fund more joined up working through the Better Care Fund.

Then there is staffing. NHS providers have been attempting to recruit more and more staff in the wake of the Mid-Staffs scandal but as Anita Charlesworth of the Health Foundation reports:

Trying to recruit additional staff while holding down pay against the background of shortage of key skilled groups such as nurses, has led to a significant increase in temporary staff. Last year the NHS’s temporary staff bill went from an already large £3.5bn to a whopping £4.5bn.

Of course, cuts to other areas of spending, most notably adult social care are also impacting on providers. Spending on adult care has fallen by 12 per cent since 2010, leading to a reduction of almost a third in the number of over-65s receiving funded support. Almost 90 per cent of councils now only fund older people classified with ‘critical’ or ‘substantial’ need, leading to inevitable increases in emergency admissions and delayed discharges from hospitals.

All of this is facing providers at a time when the NHS is searching for efficiency savings of up to 3 per cent a year, over three times higher than the long run NHS performance of 0.8 per cent. As the Five Year Forward View puts it:

For the NHS to repeatedly to achieve an extra 2 per cent net efficiency / demand saving across its whole funding base each year for the rest of the decade would represent strong performance – compared with the NHS’s own past, compared with the wider UK economy and with other countries’ health systems

That the NHS has managed to achieve savings between 1.5 per cent and 2 per cent in recent years is largely down to two factors, neither of which is sustainable.

First, pay restraint has contributed about 40 per cent of the savings to date. But sacrificing the living standards of NHS staff already bearing the brunt of doing more for less at a time of upheaval across the system has already led to a crisis of morale, with industrial action looking to continue into 2015. Recruitment and retention problems are already beginning to kick in too.

Second, the largest savings have been made through building in stretching efficiency targets into the tariff. That’s the fixed price that NHS providers can charge commissioners for the majority of procedures and treatments they undertake. Hospitals have faced a real terms cut in tariff prices of 6.3 per cent from 2010/11 to 2014/15. The extent to which providers can continue to absorb these cuts without impact on care quality and service provision is uncertain.

One case study outlined by the Kings Fund is instructive

Having already delivered £50m in efficiency savings in the past five years, one large foundation trust we visited estimated it needed to find another £70m over the next five years (4 per cent a year) to avoid being in deficit. Its board concluded this is unachievable and set a lower savings target. This means drawing down its reserves for the next two years. After that, it will move into debt. This is against a backdrop of rapidly escalating demand – emergency admissions increased by 15 per cent last year, while A&E attendances are more than 30 per cent higher than expected. Surgical admissions have also been increasing by 5 per cent a year.

No wonder then that they conclude:

Current productivity policy levers – such as freezing pay and bearing down on the tariff – were not seen as sustainable, even over the next few years. With ‘salami slicing’ of budgets, and having all but exhausted the more traditional internal cost-reduction efforts, local health economies needed to think more collectively (and with guidance) about how to provide services within budget.

All agree that that the long term solution lies in some combination of increased funding and productivity gains, largely delivered through new ways of working with a greater focus on prevention and integration. The Five Year Forward View calls for two thirds of the projected £30bn shortfall to be made up through efficiency and productivity gains, leaving an £8bn funding gap for the government to plug.

This is clearly preferable to the staff cuts and service rationing that we’re seeing in some quarters recently. But we should caution against glib assumptions that greater integration and prevention, with increased care in primary and community settings, will inevitably lead to significant savings, even though it might be the right thing to do for patients.

A recent report by a commission put together by the HSJ labelled NHS England’s prediction of £22bn productivity gains as “a heroic assumption” stating the evidence as “lacking”. They go on to say:

There is a myth that providing more and better care for frail older people in the community, increasing integration between health and social care services and pooling health and social care budgets will lead to significant, cashable financial savings in the acute hospital sector and across health economies. The commission found no evidence that these assumptions are true

They cite key research looking at integration across different countries, such as Nolte and Pitchforth’s 2014 World Trade Organisation paper, and found no evidence of reductions in hospital admissions or increased cost effectiveness resulting from integration, although there were better outcomes for patients. So while integration remains an essential, albeit often elusive, aspiration for improved health services, it may prove to be far from the silver bullet that many in NHS England and the Treasury are hoping it is.

As well as using up to £3bn in precious NHS resources, the government’s massive top down reorganisation of the NHS may also prove to be a hindrance to greater integration and efficiency. The extreme version of the provider / purchaser split imposed on local health economies has increasingly pitted commissioner against provider, particularly with foundation trusts searching to maintain a year end surplus, leading to an escalating “financial arms’ race”. Bob Alexander, the finance director of the NHS Trust Development Agency describes a situation with “providers tracking down every last opportunity to charge and commissioners following a strategy… fundamentally based on finding ways not to pay for stuff.”

We recently saw how NEW Devon CCG proposed restricting the commissioning of procedures for certain categories of patient. HSJ’s survey of CCGs found that over 70 per cent are looking to save money by banning or limiting treatments that are not clinically justified but around 10 per cent also think it likely they will ban or limit clinically justified treatments as well. Of course, the commissioner / provider split has a non-collaborative relationship at its very core, given that acute providers rely on commissioning of services from organisations that are charged with finding increasing ways of providing services out of hospitals. Over 60 per cent of CCGs surveyed by HSJ think it likely that they will significantly reduce hospital activity and capacity in the next 12 months.

This dysfunctional relationship might further increase as GPs and hospitals begin to compete with each other in providing the new forms of care model outlined in the Five Year Forward View. What will happen in a local health economy where the CCG is looking to commission a GP-led provider model or Multi-Speciality Community Provider (MCPs) while the local foundation trust is aiming to establish a hospital-based Primary and Acute Care System (PACS), competing for a dwindling pool of resources while trying to deliver a more integrated system?

Ultimately, any long term solution must be based on five key principles.

First, we need a fundamental review of the real costs of maintaining a high quality health and social care system that meets the needs of our changing demographics and then a genuine debate about the funding choices available to us. The Five Year Forward View goes some way to achieving this but falls short in that (a) it necessarily focuses on health to the exclusion of social care funding and (b) is unable to explore more political options, such as additional tax-funding, that go beyond the remit of the NHS bodies producing the review.

Second, this debate needs to be informed by a rigorous, evidence-based analysis of what sustainable, cashable savings may be accrued through greater integration, prevention, pooling of budgets and other initiatives that make up the proposed productivity gains in the Five Year Forward View and elsewhere.

Third, genuine productivity gains based on new ways of working will require injections of additional funding above and beyond what is needed to meet rising demand and maintain service levels. Transformative change costs. There is no short term fix. The Five Year Forward View was right to call for a transformation fund.

Fourth, the NHS needs a sustainable approach to recruiting, retaining and developing a high quality workforce. That must be based on decent pay and a fair system of national pay determination that allows all parts of the country to attract high quality staff. It is not only unethical to expect the funding gap to be plugged by suppressing the pay of NHS staff but it is clearly unsustainable. As feast and famine continues, providers will be thrown into more financial turmoil as they seek further temporary staffing solutions or the government will be forced to find more emergency funding.

Fifth, we need to put a stop to the increasing fragmentation of local health economies that have been imposed as a result of the government’s restructuring of the health service and the escalation of outsourcing of services to competing providers.

The £2bn announced in the Autumn Statement might provide some welcome relief to providers in the short run. But the lion’s share will going into filling the gaps left by 4 years of under-funding, including maintenance backlogs in some cases. Funding for innovation in GP services still falls far short of what’s needed. And over the longer-term, we need a new sustainable approach to funding that’s based on more than “heroic assumptions” about efficiency gains for which there is little hard evidence.