If your household finances were like the NHS

Attention in the run up to the Autumn Budget has focused on how much money the NHS needs in the future, but why have hospitals ended up deeper in the red than official figures show? Sally Gainsbury explores.

Blog Post

Published: 22/11/2017

How bad is the financial situation in NHS trusts?

The story told in their collective accounts is bad enough: a net overspend of £2.5 billion in 2015/16, followed by £791 million in 2016/17 and £1.2 billion just halfway through 2017/18. But even those figures are flattered by billions of pounds' worth of accountancy adjustments and one-off savings.

But what do these adjustments and one-off savings involve?

Imagine we’re not talking about the NHS here, but your household finances, and it’s that time when your monthly income won’t cover your monthly outgoings.

First you try the genuine efficiencies: swap to discount supermarkets and their funny tasting baked beans.

But if you’re unlucky, those things aren’t enough.

So you put off household repairs and paying bills – at least waiting until the final demand comes through. You sell the car and inessential furniture.

You can’t afford another loan from the bank, so a rich relative steps in to help you out, just this once. After all, you need to learn to live within your means.

You kid yourself it’s not as bad as it seems, as a good chunk of the stuff you buy each month – those beans, clothes for the kids – could kind of be seen as an investment, couldn’t it? They’d be worth something on eBay, after all. Soon you find yourself obsessing over dribs and drabs of cash owed to you by friends who just need reminding to return it – those times you bought a round but they didn’t buy you one back.

By now, your day-to-day finances are held together by a series of grubby sticking plasters that keep peeling off. It’s not like you can stop feeding the kids, so the only sustainable solution is to ask the boss for a substantial pay rise, but that seems unlikely. So you just keep trying to find new cut-backs – however temporary or self-defeating.

This has been the financial reality for many NHS hospitals and other services since 2015.

Desperate measures

Understanding the scope of these measures is key to understanding why increasing numbers of NHS trusts are now having trouble paying their bills: because their chronic shortage of cash belies the flattered picture set out in their accounts. It also explains why hospitals and other services continue to be under pressure to find multi-billion pound cuts to their costs, year after year, despite government claims they are giving the NHS “more money than ever”.

Raiding the kitchen cupboard

The biggest single measure came in the financial year 2015/16, and was the equivalent to kidding yourself the consumables in the kitchen cupboard are somehow an asset on your mental balance sheet.

Through a series of accountancy acrobatics that year – urged on by central pressure – NHS trusts conjured away £1.2 billion in overspend from their accounts: discounting day-to-day expenditure that could be reclassified as ‘investment’; optimistically chalking up income as banked but which would normally be viewed with more circumspect, while taking precisely the opposite approach to outgoings.

Of course NHS providers made real cash savings too. Around £3 billion in both 2015/16 and 2016/17. But while the majority of those savings were for the long term, a quarter of them were one off: selling the furniture (or rather vacant plot of land) and putting off paying bills.

These types of savings do genuinely increase income, or reduce costs, but only as a one off. The financial hole they are designed to fill simply re-emerges the following year.

Benevolent relative?

Time then, by 2016/17, for the NHS equivalent of the rich family member to step in, bailing trusts out with an extra £1.8 billion in cash.

But this was no indulgent great aunt. This was HM Treasury. It didn’t say, “it looks like you’re having to make unsustainable levels of cost cuts, so let’s boost your income to even things up a bit”. Instead it said: “You need to cut your costs further still, so you can live within your means. We’ll give you some cash as a bribe if you do that, but only on the condition you don’t then spend it.”

It sounds perverse, but the Treasury rationale for that was very clear: the £1.8 billion came from a ringfenced fund intended for investing in the new NHS services that are central to the Government’s Five Year Forward View – such as new community health facilities. So the Treasury could not allow trusts to get used to spending the cash on existing services. If trusts did that, they would need the same amount again every year, as permanent recurring income, making it impossible to shift it to the flagship policy.

As it is, the scale of hospital deficits is such the Treasury has had to concede to the bailouts being repeated in 2017/18 and 2018/19. But the cash will still only be handed over to trusts who can show they are cutting, rather than increasing, their expenditure, relative to the number of patients they treat – as the plan for now remains that the funds will be shifted to fund the needed new services from 2019/20.

Real deficit

Stripped of the accountancy window dressing provided by these measures, and the real deficit for 2015/16 balloons from the reported £2.5 billion to an underlying £4.3 billion. In 2016/17 the underlying position improved slightly, to a £3.7 billion deficit for the year. Halfway through 2017/18 things worsened again, with trusts overspending by average £346 million a month between April and September – putting them on track for a full-year underlying deficit at least as bad as in 2016/17.

To put those monthly overspends into context: NHS trusts collectively spend around £225 million a day in caring for patients. The underlying deficit currently means they have no regular income to cover their costs for the last one-and-a-half days of each month.

It is that underlying – rather than reported – deficit that trusts need to cut their costs by to even start to balance their books, which explains why trusts are being asked to find over £3.6 billion of savings this financial year – half a billion more than they managed last year.

Are there any prospects for improvement? Our graph here tracks the average reported monthly under- or over-spend by NHS trusts for each financial quarter going back to April-June 2015 (this is the average within the quarter, rather than the average year to date – to show quarter-by-quarter changes). It then takes off the one-off savings made within each quarter, and then (from 2016/17 onwards) the quarterly bailouts received from the Treasury fund. Last we remove the impact of changes to the accounts (typically made in the last months of the financial year, but hard to pinpoint a timing precisely – which is why October to December 2015 shows a sudden bulge, which in practice may have been smoothed out over the earlier months too).

Average reported and real overspending by NHS providers 17/11/2017

Chart

Note:  

Non recurrent savings during January to March 2017 averaged £90m a month, of which £32m a month appeared as reported surplus.

Source:  

Analysis of NHS Improvement quarterly reports.
 

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The resulting figures show that during July to September this year, underlying spending was £306 million more than reliable, regular income. While that marked an improvement from April to June, where the monthly overspend was £386 million, the trend since January 2016 has been relatively flat.

That isn’t because trusts are not making large, recurrent efficiency savings each quarter. They are – and at 2.3 per cent by halfway through 2017/18, they are making them at a slightly higher rate than the Government’s own review found was reasonable or evidenced by systematic waste. Their problem, however, is that their reliable income is being cut at an even faster rate still. It will take more than just the NHS equivalent of shopping at a discount to fix this.

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