We live in an age of austerity. The Prime Minister and Chancellor tell us this. Their Labour counterparts agree. Headlines tell us that the situation in the Eurozone means that public spending must fall. This mindset has, of course, translated to the NHS. Although the health service has been sheltered from the worst of spending cuts, the savings imperative is clear and stark.
With the publication of the new Health Select Committee report we, once again, see dire warnings of the NHS’s financial plight. Critics argue that the focus must be on achieving the £20 billion of savings the NHS has been tasked with delivering and that the reforms are simply a sideshow to this challenge. The Government contends that reform is essential to finding the savings but I do not want to use this blog to dwell on this debate. Instead, I want to explore a theory about how well the delivery of savings is shaping up.
I think the savings are easier to come by in the NHS than anyone has thought. And I think even the Government has been surprised by this. Why on earth would I think this, given the opposite view prevails so strongly?
There are three arguments.
First, the savings challenge – the hypothetical £20 billion – is the theoretical level of savings needed by the NHS over the next few years if demand for healthcare (and spending on it) continued to grow at the rate of the recent past. But the spending increases we saw over the last 10 years were the exception rather than the rule by historic standards. As a result, we now have many more doctors and nurses – and new buildings – than the NHS had ten years ago. We simply don’t need to see these increases again over the next few years. At least in the NHS, the previous Government did fix the roof when the sun was shining, and it is unlikely to need fixing again for a while yet. Once you strip out these investments, the ‘savings challenge’ may be far smaller than has been suggested.
Second, where has the NHS spent its annual increases in the past? The answer is mainly on staff pay. The NHS is by necessity a labour-intensive organisation, particularly by the standards of the rest of our developed economy. By some estimates, staff pay is as much as 70% of its cost. That means that simply by freezing pay the Government can stop much of the need for increases in NHS spending. And it has frozen pay. And as a result – though the latest figures are not yet available – the gospel truth of “NHS inflation is higher than general inflation” may no longer hold. This could mean that the planned negligible real-terms increases in the NHS budget are actually more generous within the NHS than they would have been previously.
Third, all the talk of austerity has infected NHS budget-holders much in the same way as it has affected the wider population. Talk by politicians of austerity leads to people feeling austere. Just as everyone is being more prudent in spending their own money, they are being equally discriminating in spending the NHS’s. When this prudence infects the entire culture of an organisation such as the NHS, even the slightest attention to more stringent housekeeping starts yielding big results.
These three arguments are, of course, theoretical. Is there any actual evidence to back up this theory?
Well, first, there was last year’s study by the Audit Commission which estimated that the NHS had delivered £4.3 billion of savings in 2010/11. That was followed in December by the Department’s own year-to-date estimate of £2.5 billion of savings in 2011/12. These represent quite significant bites out of the £20 billion target.
So it seems that the NHS has delivered significant savings over the last 18 months. And then, perhaps more interestingly, there is the extraordinary splurge of cash the Government has unleashed on the NHS in recent weeks. Indeed, the Government seems to be partying like it’s 2003. Announcements based on extra cash are back in fashion:
- “NHS to get £100m cash injection to improve services”
- “£150m extra to help people leaving hospital”
- “£20m extra to help people live independently at home”
- "£185m bailout for NHS claims fund”
- “£300 million for capital spending”
These recent stories are not reannouncements. They represent new initiatives, with substantial funding which had not previously been committed. And there have been no transfers of money from the Treasury to the Department to fund these commitments. The money is coming from within the budgets the Department of Health was given back in the oh-so-austere Spending Review. The days of large central budgets with built-in slack are over, so the only reason why this money is available must be because the NHS hasn’t spent what it was given.Perhaps money is not too tight to mention in the NHS after all. What if the NHS has become so good at not spending its money that the famous Coalition commitment to increase the NHS budget in real terms every year is suddenly in danger?
This might not be such a bizarre theory. If you take a look at each of the announcements in turn:
- The £100 million must be spent this year
- The £150 million is for this year’s winter pressures (we must hope that winter is over by April)
- The £20 million, again, needs to be spent this financial year
- The £185 million is to cover the cost of claims and legal fees until April
- The £300 million is for projects on which spending can take place this year
Collectively, these announcements total over three quarters of a billion of spending. That sum of money could well be the difference between the Government meeting, and breaking, its promise.
At the end of the second financial quarter, the NHS was forecasting a combined surplus of nearly £1.2 billion. History tells us that the NHS usually errs on the side of caution at this stage of the financial year. For example, a projected surplus of nearly £1.3 billion at the end of the second quarter in 2010/11 turned into a final surplus of something closer to £1.4 billion. So the evidence points to a surplus and, although the final surplus will be small in the context of overall NHS expenditure, it could be politically very significant.
The miniscule nature of the real terms increase leaves very little margin for error: out of a budget of over £100 billion, an unexpected £10 million here or there could result in the Government’s flagship commitment being breached. Alternatively, it could lead to the Department of Health overshooting, causing difficulties with the Treasury. The household equivalent of this would be trying to control annual household expenditure down to the nearest ten pounds. There is a financial tightrope to be walked.
This is not to decry the longer term financial challenge facing the NHS. Many of the savings to date have been centrally driven. The really hard savings have yet to come. But, amidst all the talk of savings and cuts in the NHS, maybe ministers’ migraines aren’t all being caused by the struggle to find £20 billion of efficiencies after all. Maybe – just maybe – their biggest short term political headache is getting the NHS to spend the meagre real-terms increases they’ve been given. And maybe we should watch this space. There might even be a few more desperate last-minute announcements before this year is out.