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Cost pressures, not demand, the main reason the NHS is struggling

Savings and productivity increases will require less focus on individual NHS organisations’ performance, and much more on looking at the health system holistically, a new report has concluded. 

The Health Foundation’s study – Hospital finances and productivity: in a critical condition? – highlights that in recent years the NHS has undergone major structural changes and has faced an unprecedented financial challenge. 

In particular, it highlights that the financial performance of NHS providers in England (acute and specialist hospitals, mental health, ambulance and community trusts) has deteriorated sharply since 2013, from a net surplus of £582m to a net deficit of £108m in 2013-14. At the end of the third quarter of 2014-15 the deficit had grown to £789m. 

Anita Charlesworth, chief economist at the Health Foundation, said: “The main reason why the NHS is struggling is not runaway demand pressures. Despite the obvious pressures on urgent and emergency care services this winter, demand pressures over recent years have been relatively modest – hospital admissions rose by 1.9% a year between 2010-11 and 2013-14 compared with an annual rate of increase of 2.8% between 2008-09 and 2009-10. 

“The big driver of deteriorating finances is growing cost pressures. The last year we have full data for is 2013-14 – in that year NHS providers costs rose by £1.4bn while their income grew by £0.7bn. And the big factor pushing up costs is rising spending on staff, and most specifically temporary staff. In 2013/14 the number of temporary staff increased by 16% and spending on temporary staff rose by 27%. 

In 2013-14, the number of permanent staff employed by the NHS rose by 2.3%, with the biggest increases in nursing staff, especially nurses in acute care settings and those working with older people. The rise in temporary staff was even greater (15.8%), resulting in spending on temporary staff growing by £1bn (27.4%) in 2013-14. 

The Health Foundation noted that data for the third quarter of 2014-15 suggest that the pressure from “spiralling” temporary staff costs is continuing, with spending on agency staff alone rising by a further 30% for foundation trusts and 25% for NHS trusts. 

“The NHS is in a hole,” said Charlesworth. “The NHS Five Year Forward View recognises this challenge and sets out a plan to put the health service onto a more sustainable footing for the next five years. To do that, Simon Stevens and the other system leaders have called for the next government to provide additional real terms funding for the NHS of around 1.5% a year, which amounts to £8bn at the end of the decade.

“Alongside this the NHS would need to deliver productivity improvements and efficiency savings of £22bn – equivalent to 2-3% a year. One of the key questions for all political parties is: will they all back the Forward View and commit to the additional real terms funding of 1.5% a year for five years?” 

Having highlighted the need for efficiency gains, the report revealed that NHS hospitals have only improved efficiency at an average rate of 0.4% a year over the last Parliament. This is substantially below previous estimates and the 2-3% set out in the NHS Five Year Forward View. 

Commenting on the report, Rob Webster, chief executive of the NHS Confederation, said: “We are calling on all political parties to commit to this and the service changes that the NHS will need to make to deliver a further £22bn of efficiency savings, requiring productivity improvements of 2-3% a year.” 

He added that this is a daunting task, and the latest report makes it clear that investing in extra staff to boost quality and safety “comes at a price”. 

“It underlines that the NHS requires a new focus on “allocative” efficiencies – by doing things in new ways that are better, simpler and more cost effective.  It is vital that the public are involved in this conversation,” said Webster. 

“The Health Foundation report states that there needs to be much less focus on individual organisations’ performance, and much more on looking at the health system. The NHS Confederation, which represents more than 500 NHS organisations, agrees that no individual NHS organisation can operate in isolation. Our members across the country are already working more closely with other organisations and sectors in their communities, not least local government. The next Government will need to better enable local organisations to take this approach by providing longer term settlements, stabilising social care and improving the regulatory and performance systems to focus more on outcomes for local people.”  

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