Feeling the crunch: NHS finances to 2020

As recognised by the NHS’s Five Year Forward View, by 2020 the NHS will need to find savings of around £22 billion in order to balance its books. This analysis examines different scenarios to determine exactly what it would take to close the gap.

Key points

  • The NHS in England will struggle to meet the requirement, set by the Five Year Forward View, to save £22 billion by 2020.
  • Our analysis examines the funding gap in detail and concludes that even if hospitals and other NHS providers made cost savings of 2 per cent a year, year after year, the funding gap would still stand at around £6 billion by 2020–21.
  • For the most part, the task of closing the health service’s funding gap will be borne by health care providers making efficiency savings. From 2011–12 to 2014–15 the target for annual efficiency savings was set at 4% per year. Providers have actually achieved savings closer to 2% over the last three years, resulting in an underlying provider deficit in 2015–16 of £3.7 billion.
  • Continuing with 2% annual efficiencies to 2020–21 would not be sufficient to close the funding gap by itself. The recent ‘financial reset’ assumes even higher efficiency savings for 2016–17 of 4%. But that would still leave providers with an underlying deficit in 2016–17 of £2.35 billion. Reducing that deficit altogether would require providers to make further efficiencies of 4% in 2017–18 and follow that with efficiencies of 3% in 2018–19. That level of recurrent, sustained efficiency saving has never been achieved to date and would still require funds to be taken from the Sustainability and Transformation Fund (S&TF) to balance provider deficits in the meantime.
  • The S&TF can only be spent once. If most of the funds are used to plug the deficit, there will be little money for the transformative service change that is required to modernise and reshape NHS services for long-term financial sustainability.
  • Activity is growing by an estimated 3.1% per year. Even if NHS providers manage to make the huge additional efficiencies set out above, a sustainable balance can only be brought into the system by 2020–21 if NHS commissioners also manage to curb the rate at which NHS activity is growing by a third.
  • The NHS is relying on service change and new models of care to curb the growth in activity and treat patients more cheaply. This is highly unlikely without access to the S&TF for transformation. As such, the two tasks of huge provider efficiencies and successful commissioner investment in reducing demand growth need to happen in a timely and coordinated fashion.
  • Providers are in deficit in part because the rate they have been paid for the procedures and treatments they carry out – set by the national NHS tariff – does not cover their costs and has been cut by an average 1.6% in cash terms a year over the last six years.
  • NHS England has agreed to increase the tariff this financial year, easing the pressure on providers slightly, but pushing commissioners into deficit for the first time by 2018–19.
  • If commissioner fail in their attempts to reduce the rate at which demand is growing, or if additional funding cannot be secured, the NHS will face some unpalatable decisions in order to curb the growth in activity and bring the books into balance. These could include extending waiting times for treatment, raising the threshold at which patients become eligible for treatment, cutting some services altogether, or closing whole sites or hospitals.
  • These rationing dilemmas come immediately after the EU referendum, which may have heightened public expectations that there will be new investment for the NHS.

Suggested citation

Gainsbury S (2016) Feeling the crunch: NHS finances to 2020. Nuffield Trust

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