Are the wheels finally coming off the NHS' finances?

While this week’s Budget contained no new announcements on health spending, it shone a harsh light on just how tough the financial challenge is proving for the English NHS.

The chart below from the Office for Budget Responsibility (OBR) shows how Government spending on the English NHS is falling as a share of UK GDP – from 6.5 per cent of GDP at the end of the last decade to 6.2 per cent in 2015-16. Health spending as a proportion of GDP last fell in the late 1990s and before that in the late 1970s – in both cases to be followed by major programmes of reform.

Source: OBR Economic and Fiscal Outlook March 2014 Table 1.3.

It looks like this is starting to bite. The Health Service Journal reports that for the current financial year the Department of Health (DH) expects to spend pretty much all of the health resource allocation for 2013/14.

This is in contrast to the first few years of austerity when the health budget was underspent – with £826 million in 2011/12 and £1.5 billion in 2012/13 left at the end of the year.

While the NHS’ long-term financial challenges are well-known, the presence of annual surpluses in recent years suggested it was coping with the short-term pressures. But, unless the Department finds quite a bit of cash stuck down the sofa at the end of the year, 2013/14 will signal a marked deterioration in its finances.

There is now a serious chance that the NHS will hit the financial buffers before and not after the next election

Looking beneath these very high level numbers it is clear that out in the health service, times are getting very tough. There are two key services where the pressure is clear to see: the first is acute hospitals (both foundation and non-Foundation trusts).

The latest data from Monitor and the NHS Trust Development Authority (TDA) shows that at the turn of the year, almost half of all acute hospitals were in deficit. The second is the specialised services (like chemotherapy and cystic fibrosis care) commissioned by NHS England, which according to their March Board reports, have overspent by £366 million or (3.8 per cent) in the first nine months of the year.

The pressure on hospital trusts is worrying, and the outlook for acute services over the next few years looks even worse. As the planning guidance issued by Monitor shows, the affordability challenge rises to an eye watering 6.6 per cent in financial year 2015/16.

Much, if not most, of this will fall on hospitals that will have to make large savings as the Government’s Better Care Fund seeks to transfer resources for urgent and emergency care to social care budgets. These trusts will also face rising employer pension contributions. Savings on this scale are unrealistic over such a short period, and there is no real plan for how to implement changes of this magnitude.

What’s more, this is happening against the backdrop of rapidly increasing cost pressures from additional nurse recruitment since the Autumn, in response to concerns about standards of patient care.

Between September and November alone the NHS employed 4,500 additional acute and elderly full-time equivalent nurses – a three per cent increase over nursing staff levels at the start of 2013/14.

Monitor’s planning guidance makes no attempt to hide the gap. It suggests that after hospitals have improved their efficiency, and Clinical Commissioning Groups and others have realised some system-wide efficiencies, there is still 2.1 per cent of the budget for which there is no clear source.

The outlook for specialised commissioning is no more encouraging. NHS England's estimate of the funding gap to 2021/22 shows cost pressures for these services growing at 10 per cent a year compared to overall health demands increasing at four per cent and, again, plans to manage this are in their infancy.

There are numerous everyday examples of waste and inefficiency in the NHS, and studies find many patients in hospital could potentially be treated elsewhere. New research from York University again points to significant variations in productivity across the service, bringing all hospitals up to the average standard could deliver important savings.

But, the unpalatable truth is that even if the NHS continues to raise its game on waste and inefficiency, we have a rapidly looming funding problem that is simply too big and too prolonged to be bridged by productivity improvements alone.

England doesn’t have a very expensive health service by international standards. Our hospital sector is small, we run it very 'hot' with bed occupancy high, and we have average to low numbers of doctors and nurses per head. Average productivity gains over the last few years have already been pretty strong at just over two per cent for 2010/11 and 2011/12. Compared to the rest of the economy, this is not bad at all.

With productivity unable to fill the financial gap, the NHS has been coping by living off some big one-off savings: wage restraint, administrative cost reductions and falling drug costs for GP prescribing. As the Health Select Committee recently highlighted, progress in making the transformative change so widely trumpeted as a possible answer has been slow. Hospitals are finding it increasingly difficult to identify and deliver their Cost Improvement Programmes.

In the end, if we want to maintain the current NHS with a growing and aging population, and tackle concerns about quality, we will have to pay for it one day. It looks increasingly like that day will come sooner rather than later. There is now a serious chance that the NHS will hit the financial buffers before and not after the next election. Even if it limps on, there can be little doubt that the position for 2015-16 is not sustainable. Watch this space.