Street View

Street View

Does the NHS really face a £30 billion funding gap?

It’s how big?

It has been accepted without question that the NHS faces a funding gap of £30 billion by 2021-21. This was the figure quoted in NHS England’s Five Year Forward View. The report’s authors claim that the figure was calculated separately by Monitor, NHS England and independent analysts. It has been widely quoted, almost as fact, ever since. But we should question this figure. Where did it come from? How has it been acted upon? What are the consequences of it being wrong?

The source of the gap

The three sources quoted in the Five Year Forward View imply that the figure has been triangulated, with three different analyses reaching the same conclusion. But details of these analyses prove elusive.

NHS England produced a graph but hasn’t published its calculations. Monitor cites £30 billion but doesn’t calculate anything. Instead Monitor lifted the figure from a report by the Nuffield Trust, which in turn cited a report it had commissioned from the Institute for Fiscal Studies (IFS). This seems to be the single source of the £30 billion figure.

The IFS performed a simple calculation, comparing NHS funding between 2014-15 and 2020-21 under two scenarios. The first was a “funding freeze”, in which NHS funding increases in line with inflation. The second assumed funding would increase by 4% a year, the annual average since 1950-51. The difference between these scenarios in 2020-21 amounts to £30 billion.

How it’s been acted upon

Since then, there has been much talk about plugging the £30 billion funding gap. The government provided an extra £1.5 billion in 2015-16 and promised to help fill the gap with an extra £8.4 billion spread across 2016-17 and 2020-21. The NHS has been told to find £22 billion of efficiency savings by 2020-21 to make up the difference.

Superficially, these numbers add up, but not to the amount required. The IFS predicts a funding gap of £30 billion in 2020-21, but shows a gap every year from 2014-15. The government seems to know there’s a gap each year, not just in 2020-21, because the extra £8.4 billion is being spread across the full parliamentary term.

If the IFS approach is correct, the cumulative funding gap between 2016-17 and 2020-21 amounts to £75.6 billion, not £30 billion. And if the government is only providing £8.4 billion, it’s not enough for the NHS to find £22 billion of savings by 2020-21. Instead, it has to come up with £67.2 billion. That’s impossible.

Are the calculations correct?

But what if the estimates are wrong? The IFS considered another scenario. Here NHS funding is projected to rise in line with national income, estimated at 2.4% a year over the parliamentary term. Under this scenario, the cumulative gap between 2016-17 and 2020-21 is £44.2 billion. Challenging, but less so.

But perhaps this prediction is wrong, too. The IFS predictions are based on simple assumptions, just a constant annual percentage increase in funding requirements. This simplicity contrasts with the sophisticated model used to forecast future costs of social care which considers changes in the population, prevalence of disability and availability of unpaid support.

Predictions about NHS funding requirements should also consider drivers of spending growth. The main ones are changes in the size and composition of the population, changes in wages and changes in NHS policy.

The Office for National Statistics (ONS) expects population growth of 3.6% over the next five years, but growth is faster among those that make greatest use of the NHS. To account for these population changes, I estimate that the NHS needs an extra £24.1 billion. On top of this, if NHS wages rise in line with wages for the economy as a whole an extra £18.3 billion is needed.

The overall cost of implementing seven-day services in hospitals and primary care is expected to cost an extra £12.2 billion over five years. Taking all of these together, the cumulative funding gap amounts to £54.5 billion over the full parliamentary term. This compares with £75.6 billion based on 4% annual growth.

Drastic cost-cutting risks harming patients.

It’s important to get it right

There are unfortunate consequences of having a poor understanding of what funding the NHS needs. First, we’re unable to judge what size the NHS budget should be and how far the government has gone in meeting future funding requirements. Second, the NHS might be overdoing the search for cost savings, believing the funding gap to be larger than it really is. Drastic cost-cutting risks harming patients.

The funding gap of £30 billion in 2020-21 has dominated recent debate about the NHS, but has clouded discussion. We need to talk about funding requirements over the full parliamentary term not just in a single year. We also need a better way of projecting future requirements to ensure that the NHS receives the funding it actually requires.