NHS: the new deficit normal

16 Apr 14

NHS trusts are sinking ever deeper into debt, and the financial prognosis is gloomy. So what happens when the cash runs out?

If my memory serves me correctly, the last time the NHS fell into deficit (2005/06 being the low point) it came to many as something of a surprise. This time – going by the responses in the King's Fund's latest quarterly monitoring report (QMR) and by the deteriorating financial position reported by Monitor and the NHS Trust Development Authority – it’s looking rather predictable.

From the QMR we are spoilt for choice over gloomy predictions: for example, more than 80 per cent of NHS trust finance directors are fairly or very pessimistic about the financial state of the wider health (and care) economy over the next year. For 2015/16, a breath-taking 98 per cent of NHS trust finance directors rated the chances of delivering the 15 per cent reduction in emergency admissions that NHS England estimates is needed as quite or very unlikely, with the `verys’ strongly predominant.

The mood of pessimism is borne out by the latest news on actual financial performance. For foundation trusts, Monitor reported that for the year-to-date 39 organisations are in deficit and for trusts, the NHS Trust Development Authority reports that 26 organisations forecast an end-year deficit. For both foundation trusts and trusts these numbers are higher than planned.

You might ask that if finance directors can see the trouble coming, what is being done to offset it?  During the last period of deficit, 2005 and 2006 were painful years as commissioners and providers took difficult decisions to balance the books and this included losing staff – though this was perhaps rarer than you might have suspected listening to the media. Today, while the search for efficiencies undoubtedly continues, the pessimism may partly reflect the increasingly difficult context. With the current focus on staffing ratios on wards and the Better Care Fund transferring more money away from acute providers in 2015/16, it means revenues may need to shrink at the same time as trusts are under pressure to increase staff, the single biggest element of costs.

The rising tide of financial woe will pose difficult questions for more than just providers and commissioners. The current NHS financial failure regime and the wider financial architecture has been designed for relatively rare persistent failure, not the general contagion that seems to be spreading. And while all this goes on someone has to pick up the tab to keep the service afloat and ultimately that can only mean HM Treasury. While the economy is now in recovery, public finances are still dominated by deficit reduction and this looks to be the situation for some time. In this environment, finding substantial additional funding for the NHS and social care doesn’t look easy even if at the point deficits strike, the government has little alternative but to pay the bills.

The risk here is that continuing to drift deeper into financial difficulty before taking more fundamental action may make the eventual reckoning even worse – whether this is due to the ever-growing gap between income and expenditure, the build-up of debt, or the loss of financial discipline as more and more organisations realise running deficits is ceasing to be a shooting offence. And in the event of any painful settling-up of bills, the public may well want an explanation of how their treasured NHS ended up in such difficulties. This will be a difficult debate should it fall before the general election.

Back in 2010, if we had been told the NHS would make it to 2014 on broadly flat real funding and be delivering services that have at least maintained performance and in some cases improved it (excepting occasional glitches on A&E), I think we would have been pretty pleased. However, having reached 2014, instead of getting ready to spend the +3 per cent real-terms growth per annum that the NHS has historically been used to, we are facing an even greater affordability challenge and trying to meet it through yet more efficiencies. No wonder finance directors are worried. This is something we will return to in our new report, published on 1 May, providing a deep dive into productivity.

This post first appeared on The King's Fund website

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