05 December 2008
The NHS has successfully turned round its financial performance and is now making a healthy surplus. But will these funds be plundered by the government in its crusade to find extra finance? Noel Plumridge reports
In medieval times, monarchs seeking to finance foreign wars or ambitious crusades would, if times were tight, visit the wealthiest barons in their land, starting naturally with any to whom they bore a grudge, and would raise loans. These loans were non-negotiable, documentation was rudimentary, and it was grudgingly accepted that in such circumstances, lending and giving cost about the same. Like any modern mugger, the king's agents would unfailingly pick on those who appeared to have the ability to pay, and had fewer men at arms than the crown.
A raid on the accumulated NHS surplus in the current financial climate is therefore not hard to predict.
For the benefit of anyone who's spent the past few months somewhere else – in solitary confinement, say, or undergoing rehab in a private clinic – economic growth is now a memory, the banking sector is in what's politely called 'turmoil', and an old friend, inflation, has been starting to rear its ugly head.
Governments that oversee falling growth face financial as well as electoral challenges as tax revenue quickly begins to dry up. Job losses and a slowdown in trade mean less income tax and national insurance coming in: these sources alone had been expected to provide £258bn (44%) of tax income in 2008/09. Consumer caution suggests significantly less VAT than the forecast £86bn. And so on. Before long a government must borrow, cut government expenditure, increase tax – or all three.
If many of the headlines about the Pre-Budget Report concentrated on taxation and borrowing, there were also clear messages about severe cuts in public spending. From 2011 onwards, many billions of pounds have been trimmed from projected expenditure levels across government: annual growth levels of between 1.3% and 1.1% fall well short of the previously planned 2% per year.
And in the interim, pressure for efficiency savings and asset disposals will grow. We don't yet know how this will affect individual spending programmes, but an extra £5bn between now and 2011 is, to say the least, challenging. The message that runs through the PBR is of urgency: hence the decision to accelerate £3bn of capital investment programmes in the hope of reviving the moribund building industry.
From a health sector perspective, the outlook appears gloomy. In the case of capital, only around £100m of the speedier capital spend appears destined for the NHS, in the form of improvements to GP premises. This reflects expedience, but also the legacy of the Private Finance Initiative. For well over a decade the government has relied on the PFI to fund capital investment and asset renewal, especially in the health and defence sectors. In practice, this leaves its more ambitious plans, such as the 'polyclinic' commitments in Lord Darzi's recent review, heavily reliant on the support of the banks. But the banks are no longer lending, as anyone attempting to raise a mortgage soon finds out.
Meanwhile, over the course of the past three years, the NHS in England has turned around its financial affairs to create a considerable financial reserve. The deficits of 2004/05 and 2005/06 have been eliminated, at least at aggregate level. In 2006/07, the net NHS surplus was £510m; last year the NHS surplus reached more than £2bn – £1.66bn in the NHS, plus a further £514m in the quasi-independent foundation trust sector.
Actually it could have been a lot more. Chris Calkin, former chair of the Healthcare Financial Management Association and finance director of the University Hospital of North Staffordshire NHS Trust, acknowledged in May that NHS trusts had been managing their surpluses down to control totals set by the Department of Health. John Appleby, chief economist at the King's Fund, suggested an apparent rush to spend NHS money might reflect a fear that it would otherwise be lost. The Treasury had previously clawed back some £2bn from unspent capital budgets.
And the pattern has continued into the current financial year, complying with a requirement in the NHS Operating Framework for 2008/09 – the Department of Health's annual priority-setting document – that: 'The aggregate resource accounting and budgeting surplus delivered in 2007/08 by SHAs and PCTs will be carried forward to 2008/09… Each SHA area should then plan for a surplus in 2008/09 at least equivalent to that total.' Unsurprisingly, the English NHS's latest financial forecast for 2008/09 suggests a revenue surplus of slightly in excess of last year's £1.66bn.
Strictly, any Treasury raid on this accumulated wealth is still a matter of conjecture. Nevertheless, one media source last month published a comprehensive report claiming that in 2009/10 NHS organisations will only be permitted to spend £400m of their 2008/09 surplus, and that up to £950m will be clawed back from uplifts to primary care trust allocations. A strategic health authority chief executive had viewed the reported cap as 'good news', on the basis that it could have been worse, but primary care trusts and NHS trusts alike expressed anxiety and, perhaps inevitably, warned that patient care would suffer.
To put a £1.7bn annual NHS surplus in context, the total English NHS revenue budget in 2008/09 is £92.5bn. This means the NHS surplus, at 1.8% per year, is probably within the margin of year-on-year budget variance that a commercial enterprise might view as unavoidable. The cliché is that achieving breakeven on such a huge turnover – now 9% of gross domestic product and rising – is akin to trying to land a jumbo jet on a postage stamp. But if achieved consistently, and converted into savings rather than being reinvested, it could ease much of the government's fiscal pain in such sensitive areas as vehicle excise duties (annual income: £6bn) or inheritance and capital gains tax (annual income: £9bn).
There is a coherent line of reasoning to underpin expediency. With accumulated non-foundation trust savings from 2007/08 and 2008/09 amounting to some £3.5bn already in the government 'bank', and previously funded by taxpayers, why should the Treasury feel obliged to repay promptly? Perhaps the NHS never really needed so much money. Other spending departments have looked on with envy for years at the levels of growth enjoyed by health budgets. Think how 7.4% growth per year, in real terms, sustained over six years, could have transformed local government or education. Even the 4% health funding growth protected in last year's Comprehensive Spending Review settlement now seems unjustifiably generous.
The NHS might find itself with few defenders in the inner circles of government. The king's loan negotiators will not need to lay siege to the castle: there will be no external rescue.
The raid is not, of course, without risks. Perhaps the greatest is that without an organisational incentive to make savings, such as the ability to reinvest, the release of those savings tends quickly to dry up. Many of the very significant improvements in NHS performance in recent years have been driven by targeted financial incentives. Payment by results rewarded hospitals, and their staff, for performing more operations: waiting times have fallen from 18 months to 18 weeks.
The 'quality and outcomes' framework in the 2004 GP contract paid GPs up to 14% more for delivering high quality chronic disease management. By 2007 the New England Journal of Medicine was praising the UK's achievement in the management of diabetes, heart disease and respiratory illness. Even now, a similar approach using direct financial incentives is being introduced, from next April, to improve clinical quality and safety in the acute hospital sector. If the NHS surplus is withdrawn, how will such improvements be sustained?
Then, last year's CSR settlement envisages the NHS releasing £8.2bn of efficiency savings over its three years. That's between 2.5% and 3% each year. The Treasury clearly intended to squeeze out the productivity improvements that had always been the intended price of the massive investment in health since 2002. In effect, more than half of the new growth was to be self-funded by the NHS. This year's budget announcement appears to significantly increase expectations.
Fine in principle, and undoubtedly there is scope for material efficiency gains within the NHS. But are such levels of savings actually bankable? Sir Derek Wanless's 2007 King's Fund review of health funding observed that planned annual unit cost reductions of between 0.75% and 1% had not actually been achieved. Relatively high annual growth levels since 2002 had been allowed to conceal a pattern of savings programmes being delivered late, if at all. With NHS managers jaded from constant restructuring and the annual cost improvement round, who now would responsibly suppose the new, challenging savings targets would actually be met?
Then there is inflation. Like the rest of us, hospital trusts are already paying higher costs for fuel, energy and food. Hospitals are having to fund the cost of price rises themselves because so much of their funding is effectively determined prior to the start of each financial year, even for treatments purchased under the 'payment by results' regime – another potential claim on that overstretched cost improvement programme.
Strategically, however, the most significant victim might prove to be that elusive concept: the freedom of the foundation trust. Will the Treasury attempt to claw back all or part of the accumulated surpluses of the 89 NHS foundation trusts from under the nose of Monitor, their independent regulator?
There is no suggestion yet of any intent to do so. But these are tough times financially. And the scars are still raw from political battles, almost six years ago, around introducing the arm's-length governance and more businesslike accounting regime of foundation trusts. Not all are convinced by the rhetoric of 'surplus with a purpose': they hint that money that might be used for patient care is being hoarded needlessly against the risk of a downturn in an artificial market. And it's not so very long since Monitor and the Department of Health seemed to be taking opposing stances on 'autonomy' following the public scandal of poor hospital hygiene at Maidstone and Tunbridge Wells Hospital that arose from a critical Healthcare Commission report.
If the monarch's loan enforcers call at Richmond House, the Department of Health's Whitehall headquarters, they'll make off with the loot. But they might leave a promissory note in return – not of title to lands yet to be conquered, as in medieval times, but of a modern equivalent. Future efficiencies.
Noel Plumridge is a former NHS finance director and the author of CIPFA's Payment by results
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