NHS hospitals in England are forecasting a £2.3 billion deficit by the end of the financial year. This is a big increase from £115m in 2013-14 and £822m in 2014-15. Hospitals are calling for debt relief and bailouts.
These deficits threaten plans to transform the NHS. Of the £2.14 billion devoted to implementing these plans in 2016-17, £1.8 billion is being spent on clearing deficits. This leaves just £340m to support the vision for integrated care and the promised “radical upgrade in prevention and public health”. And channelling more money to hospitals means less is available for community and mental health services. So dealing with these deficits is skewing NHS priorities now and into the future.
But what has caused the deficits and what can be done about them?
Grounds for complaint
Hospitals blame the deficits on things outside their control. They have two main grounds for complaint. First, they are not paid enough for the care they provide. Hospitals are paid according to how many and what type of patients they treat. When this payment system was introduced in 2003-4 the price per treatment was based on average costs reported by all hospitals. But since 2005-6 prices have been reduced by an annual “efficiency factor”. From 2011-12 to 2014-15, this was a particularly challenging 4%. Hospitals have been unable to meet this challenge in full each year. These shortfalls have contributed to the deficits.
In January 2015, hospitals rebelled, objecting to a proposed efficiency target of 3.8% for 2015-16. The target was subsequently dropped and, in a reversal of past policy, 2016-17 prices are to include a 1% “cost uplift”. But the deficit damage has already been done.
The second point is that hospitals are treating more patients because other parts of the system aren’t working effectively. For instance, more people are going to A&E because social care support has been cut back and because the new 111 telephone service advises more people to go to A&E than the old NHS Direct.
Similarly, emergency admissions to hospital have been rising by 2.4% a year since 2011-12 and by 3.7% between 2013-14 and 2014-15. If patients turn up needing emergency care, hospitals can’t simply turn them away. While hospitals get paid more, the more patients they treat, since 2010 they have received only 30% of the usual price for emergency patients. Hospitals complain this isn’t enough, and it has now been increased to 70%.
Running up deficits
But there are counter-arguments that hospital deficits are partly of their own making. Hospitals are indeed treating more patients, but do they all need hospital treatment? While emergency activity has been increasing, elective activity has been increasing even faster, by 3.5% a year since 2011-12, and 5.1% between 2013-14 and 2014-15. The fastest growth has been for people coming to hospital for investigations and day-case treatment. Some of these people might have been treated elsewhere, but there have been long-standing concerns that patients would be “sucked into hospital” by hospitals wanting to increase their income.
This will only get them out of financial trouble, however, if the additional income generated covers the extra costs incurred. That is increasingly unlikely because prices are based on average costs minus the annual efficiency factor. This makes it more difficult to cover the costs of treating more patients.
To make matters worse, most hospitals have little understanding of how much it costs to treat their patients. The best information comes from patient-level costing systems but only 42% of hospitals are using these. If they don’t have accurate cost information, hospitals can’t tell whether treating more patients will relieve financial pressure. If costs are higher than income, treating ever more patients will make deficits worse.
The original attraction of the English hospital payment system was that it offered equal pay for equal work – hospitals are all paid the same price for a particular treatment. This principle remains sound, but the payment system needs refining, although the recent removal of the efficiency factor and price increases for emergency admissions should improve matters.
When the payment system was first introduced, it was also hoped that money saved by preventing hospital admissions could be invested in alternatives to hospital care. But there has been little success in preventing emergency admissions and even less in reducing elective admissions. The result has been that hospitals have been accounting for an increasing proportion of NHS expenditure over time. That trend won’t change while extra money is being used to bail out hospitals. And it won’t change until hospitals stop focusing solely on income growth. They have to start getting a better grip on their costs.