23 January 2009
The NHS will feel the recession keenly, having to cope with rising demand while trying to find savings. But, as NHS spending is a major component of demand in the economy, its relative good health will be assured
For NHS managers, in common with the rest of the country, worrying times are ahead. The recession is just one part of a wider economic story of high commodity prices, high and variable fuel and food prices and the low value of sterling making it difficult for businesses nationally. And the NHS is not immune to this.
As part of the government’s response to the financial crisis, national insurance will increase by 0.5% for employers and employees from April 1, 2011. This will immediately increase NHS employment costs from 2011/12 onwards. And the VAT rate will return to 17.5% on January 1, 2010, which presents opportunities in the fourth quarter for ‘stocking up’.
The Pre-Budget Report, while not setting out specific departmental spending plans, also provides some insight into the future financial position of the NHS. For the 2008–2011 Comprehensive Spending Review period, the PBR restates detailed departmental spending limits. This shows NHS England’s spending increasing by 6.3% and 6.5% in 2009/10 and 2010/11 respectively. Despite the economic turmoil, current spending plans are being maintained at the level consistent with NHS planning assumptions.
There are no declared departmental spending limits for the 2011–2014 CSR, however. The government assumption is that total current spending will grow, in real terms, by 1.3%, 1.2% and 1.1% in 2011/12, 2012/13 and 2013/14 respectively. This means cash-based current spending will increase by about 4% each year during the next CSR. The years of feast are over.
The current CSR assumes that headline growth is supplemented by productivity improvements that add to the purchasing power of public bodies. In the NHS, there is a 3% improvement target, which manifests itself to providers as a 3% reduction on tariff prices.
The Pre-Budget Report announced requirements for a further £5bn value for money saving in 2010/11, the final year of the current CSR. It is not yet allocated to programmes but is shown as a deduction from the total government spending in 2010/11. The £5bn represents 1.4% of current spend in 2010/11. If applied equally across all government spending, it would increase the productivity target to 4.4% across the NHS.
On the ground, this means that commissioners must focus on spending their money wisely in a way that maximises health gain, and providers should focus on improving productivity. If there wasn’t reason enough before, both commissioners and providers will need to increase the focus on the ‘Better care, better value’ indicators.
Commissioners would need to ensure greater use of generic prescribing, reduce emergency admissions and ensure a more appropriate use of out patient services across primary and secondary care. For providers, this means working with primary and intermediate care to improve discharge planning and reducing length of stay, improving the use of pre-operative beds and reducing the use of agency staff. It means that boards should focus on high quality care.
The financial turmoil also means we should push on with the reform programme. This includes developing world-class commissioning that meets patient needs and uses choice and competition to improve patient experience, outcomes and value for money. Flexible, responsive and diverse supply sides need to be developed by opening up new areas to real competition to ensure the best deal.
NHS leaders also need to pay attention to the broader implications of the wider economic and financial climate. Although the government is taking action, it might not be enough to prevent a severe recession.
A steep downturn in the economy is likely to result in greater fuel and income poverty, reduction in pension funds and pensions, increased ill health and mortgage repossessions – all of which risk increasing demand pressure on the NHS (see table, above). There are several potential consequences that boards should start thinking through and planning for.
There might be: greater use of acute and accident and emergency services due to greater demand from elderly, poor and vulnerable people as winter progresses; greater use of mental health services due to a rise in the prevalence of mental health issues, increased alcohol and substance misuse and more suicide attempts; and reduced use of maternity services as family planning is delayed until the economic environment improves, as happened during the great depression. And will consumers turn back to cheaper processed foods instead of costly fresh vegetables and reduce sport and gym club memberships, increasing cardiovascular and obesity risk?
But in addition to these wider economic and social impacts on the demand for NHS services, there are a series of medium-term implications that NHS boards and managers also need to start thinking about. Providers should be considering the impact on their business. The foundation trust regulator Monitor will also probably explore how boards are assessing such risks in terms of business viability.
Providers should be considering the potential impact on medium-term planning. Areas with a high market penetration of private medical insurance will probably see a shift in demand back into the NHS. But providers should also consider the risks.
They should assess the impact on long-term financial models of changes to the cost of capital. The public sector rates mirror the market rates, so loan prices might change.
There will also be increased costs and business risks. Higher and variable fuel prices, which account for around 0.5% of hospital costs and higher food prices, are fuelling higher wage demands which account for two-thirds of costs. But any recession might reduce wage inflation, depending on how the wider labour market feeds and affects NHS labour markets.
Capital development is becoming more risky, with land values falling and construction and finance firms becoming more vulnerable. The Private Finance Initiative and the Local Improvement Finance Trust both look increasingly uncertain. Monitor might become more risk-averse in authorising trusts with large capital plans, so steps should be taken to mitigate risks.
It will, however, be a good time for trusts to invest in key worker housing at rock bottom prices. It is also a good time to give a much needed push to the green agenda. Providers and commissioners should consider investing in green technology as well as sourcing from local providers.
The impact of the downturn on the NHS overall, however, is likely to be less than other parts of the economy. The level of health care spending in the national and regional economies is a major component of demand in the economy, affecting employment. Government health care spending, which has the objective of contributing to the mitigation of health disparities and inequalities, supports higher levels of regional employment and investment than might otherwise be the case. So, ultimately, the Department of Health and the Treasury are unlikely to pursue drastic cuts in the medium to longer terms.
But this role in the wider economy means boards should also respond to the push from the Treasury to reduce the time it takes for the NHS to pay creditors to improve the cash flow of businesses who supply the NHS from 30 days to ten days. This will make it easier for businesses to avoid the credit crunch and prevent more bankruptcies than is absolutely necessary.
The wider economic slowdown impact on the NHS needs to be thought through, but it is not all bad news.
