News / News analysis: Feeling the squeeze

Cynics will have a wry smile on their faces. They will feel that with the arrival of the spring flowers and the imminence of the new financial year comes the annual cry from the NHS that it is under increasing financial pressure and will face tough choices in the following 12 months.

Not wishing to disappoint, in February a King’s Fund survey demonstrated that finance directors were worried about the stability of their wider health economy over the next year. So far, so predictable to some. But 2013/14 is different. As with every year there are additional financial pressures, but this year a new commissioning structure in England will cause uncertainties and in June the government will unveil the conclusions of a one-year spending review. And the public will expect action to address the issues raised in the Francis report into Mid Staffordshire NHS Foundation Trust.

There is no doubt that financial pressure is increasing – particularly for providers, which face a 1.1% drop in tariff income this year. The freeze on pay over the past two years – when the NHS ‘only’ had to pay incremental rises – helped curb provider spending. Indeed, in March the Commons public accounts committee report on NHS progress with efficiency savings said the pay freeze had delivered most of the savings to date.

But this will change. As the chancellor announced in his Budget in March, in each of the next three years expansion of the pay bill will be set at 1%. NHS Employers said this would cost the health service in the region of £500m, while 60% of all nurses, administrators and other staff groups received increments in 2012/13 equivalent to average salary increases of 3.4% – adding 2% to the agenda for change pay bill. In some cases, these are as high as 6.8%, while doctors’ increments were between 3% and 8% of individual salaries. In its most recent submission to the NHS pay review body, NHS Employers said pay costs were projected to grow from 57% of spending in 2012/13 to 63% by 2014/15.

Chancellor George Osborne agrees with NHS Employers. In his Budget he said he would seek ‘substantial savings’ from progression or incremental pay. These pay rises were difficult to justify when others in the public sector, and those in the private sector, had seen pay frozen or cut, he said. ‘I know that is tough, but it is fair.'

Last month an NHS Confederation report, Tough times, tough choices, highlighted demand pressures associated with lifestyle choices, such as smoking, drinking alcohol to excess and obesity. The NHS now spends almost £18bn a year on services to treat diseases and conditions associated with these lifestyle choices. The cost of private finance initiative schemes would also likely double in the next 17 years, it added.

The problem for the NHS when highlighting financial pressures is its recent successful financial record. Though there are areas in obvious financial difficulty – one primary care trust and five NHS trusts forecast deficits, according to the 2012/13 quarter two report from the Department of Health – the overall surplus remains healthy at £1.59bn in 2011/12 and at least £1.2bn in 2012/13. Overall, foundation trusts remain in stout financial health. At the end of quarter three in 2012/13 they had an aggregate surplus of £365m, holding £3.89bn in cash. However, the mixed nature of the picture was highlighted by the fact that 19 foundations were in deficit (down from 26 at quarter two). But with so much funding in the system unspent and with the NHS continuing to get protection from austerity-driven cuts, complaints about financial pressures are likely to go unheard.

Launching the Tough times, tough choices report, NHS Confederation chief executive Mike Farrar said there were four options for the NHS. The first two – doing nothing or spending more – are politically and economically unworkable. As the report said, doing more of the same could lead to a greater number of services and organisations going into deficit, which would have a likely impact on services to patients. Spending more – either by raising money through taxation or user charges – would be difficult to sell to the public.

Different approach

That leaves two further choices – doing more for less or doing things differently. The former is well known to finance managers, forming the basis of cost improvement plans delivered with some success across England over the past two years. Nationally, the Department has helped, with the aforementioned pay freeze and deals to cut the cost of drugs. But Mr Farrar said NHS leaders questioned the sustainability of this strategy. It was time to do things differently.

Within the service there has been a growing consensus that the NHS has to reengineer the way it delivers services to patients. The confederation report said this meant addressing oversupply of services as well as consolidating specialist services into dedicated units, which could be more efficient and offer better outcomes for patients.

It also meant changing care pathways. Delivery of NHS services has largely remained the same since 1948, so it has been slow to react to the changing needs of patients, who are more likely to need support for long-term conditions rather than short-term, episodic care. Studies had shown up to a third of patients in hospital beds were there unnecessarily, the confederation said.

‘The NHS is facing severe pressure on its finances. We are coming to a critical juncture and need to have a frank discussion about the road ahead. This is a crucial time to show our commitment to improving the way we work and how we involve the public in decisions about their care,’ Mr Farrar said.

‘The simple truth is that we have been slow to change the NHS into a truly modern and efficient service. In the past, the easier options have been to spend more money on health or to focus on doing more for less. We know we can do much more to create an affordable system that works in the best interests of patients. Getting real bang for our buck will require some tough choices and will require strong political will and public support.’

But it is difficult to make changes. The South West Pay, Terms and Conditions Consortium – which looked at ways of reducing trusts’ pay bill – provoked widespread anger. It produced its final report at the beginning of March and there appears little appetite among its member trusts to move on its suggestions.

And, though most agree that consolidation of children's heart surgery into six or seven specialist centres is the best option for patients, the debate over which trusts should provide the service rages. It took a further twist in March when a parents' action group won a judicial review over the decision to move the service away from Leeds General Infirmary.

And despite successive governments insisting services must be moved out of hospital and into the community, a recent report from the Nuffield Trust said spending on hospital care had increased by an average of 5.2% over the last five years.

Changing the NHS is often likened to attempting a u-turn in an oil tanker – it is not easy. Financial pressures are already accelerating the need for transformation. The NHS knows this, but needs to convince the public, politicians and the cynics.