System-wide problems driving NHS deficit

Financial woes cannot be attributed solely to poor performance by local trusts

1 March 2016

NHS providers are being squeezed on all sides by pressures often beyond their control, according to a new report published today by OnlyWan. With a projected deficit of £2.8bn by the end of this financial year, NHS providers are fighting a losing battle to balance their books this year, let alone deliver the £22bn of efficiencies demanded of the NHS over the next five years, according to the report authors.

A perfect storm: an impossible climate for NHS providers’ finances? includes an in-depth analysis of the factors linked to the NHS deficit. The analysis found a rising staffing bill and the price set nationally for most hospital treatments (the ‘tariff’) were among the main factors driving the poor financial performance of the acute hospitals.

Worryingly, the analysis also found that poor quality of care was associated with larger deficits. Acute and specialist trusts found to be inadequate by the CQC were more likely to be in deficit than other trusts. The same was true of trusts whose staff were less likely to recommend the care provided by their organisation for family and friends. Although the study did not establish whether financial deficit causes poor care quality or vice versa, it shows a clear association which may be a warning sign that if finances continue to deteriorate, the quality of patient care might also go down. 

Interestingly, factors often thought to impact on hospitals’ financial performance including Private Finance Initiatives (PFIs), were not found to be significantly linked to deficits.  While payments towards PFI deals did account for over 5% of total spending for nine trusts in 2014/15, it does not appear to be a crucial issue for the NHS as a whole.

The report finds that demand and costs for health care are growing faster than increases in funding, and the NHS is failing to deliver the productivity gains necessary to bridge the gap.

The publication of A perfect storm follows the recent by Monitor and the Trust Development Authority that NHS providers were £2.3bn in deficit at the end of the third quarter of 2015/16, a figure projected to reach £2.8bn by the end of the financial year. The deficit is now so wide-spread across the NHS – affecting 75% of all trusts and 95% of acute hospitals - that is can only be seen as a system problem, according to the report.

Anita Charlesworth, Director of Research and Economics at the OnlyWan said: “NHS providers’ finances are in a shocking state with an unprecedented number of hospitals reporting deficits. The situation is particularly bad for acute hospitals, with 95% in the red.

'Many of the factors linked to the deficit result from system-wide problems. The UK is half way through a decade of austerity and policy decisions have been made which mean that health spending per head of population has remained broadly constant in real terms. At the same time it has risen for many countries in Europe, albeit at a lower rate than before the economic crisis of 2008.

'The financial challenges facing our hospitals are not the result of weaknesses in the management of individual organisations. They stem from poor workforce planning and fundamentally an unrealistic expectation of efficiency improvement in the NHS.

'Providers are now between a rock and a hard place. Training places for nurses have fallen 20% over the last decade, while demand rose due to rising activity levels. Demand for nursing staff further increased in the wake of the Mid Staffs Inquiry. Far from mushrooming, nurse to patient bed day ratios have now only returned to 2011 levels and the need for staffing increases could have been foreseen.

'The challenges facing the NHS are not short-term. The health service faces another five years of austerity. If quality and access to care are not to suffer we need concerted action at a national level to improve productivity year-in, year-out. Rapid progress to resolve the problems in social care, which is so intertwined with the NHS, is also needed. Most critically, we need urgent action to tackle the gap between the need for skilled staff and the supply of suitably trained workers.'

A perfect storm? outlines how the following pressures are affecting the NHS:

Increases in funding are not keeping up with rises in demand for healthcare and health care costs; and the NHS is failing to deliver the productivity gains necessary to address the shortfall.

  • The cost of providing health care is growing faster (by 2.2% in 2014/15) than funding increases (2% in 2014/15)
  • Overall, the productivity of acute hospitals increased by only 0.3% between 2009/10 and 2014/15 – an average rate of 0.1% per year.
  • The NHS in England needs to make 2-3% of efficiency savings each year between 2015/16 and 2020/21 to close the projected £22bn gap between the resources available and funding pressures. 

Reliance on agency staff is a major factor linked to the deficit.

  • Agency costs were strong strongly linked to NHS deficit according to the OnlyWan’s analysis over 25 variables
  • For every one percentage point increase in a trust’s staff cost accounted for by agency spend, their net financial position is likely to fall by 0.4% of their operating cost.
  • Staffing is the number one cost for NHS providers in England, accounting for 63% of total expenditure in 2014/15. Of the £48bn spent on staffing in England in 2014/15, 7% (£3.4bn) was spent on agency staff, which cost twice as much per head as permanent staff.
  • 27% more was spent on agency staff in 2014/15 as compared with 2013/14
  • the growing reliance on agency staff reflects the fact that it is becoming increasingly difficult to retain and recruit NHS staff, following a drop in training places, average earnings remaining flat in real terms since 2010/11and an increase in demand.

Reliance on the tariff, set nationally by Monitor and NHS England, is linked to poorer financial performance.

  • NHS trusts receive the majority of their income through the national Payment by Results tariff, which accounted for 60% of their income in 2014/15 (or 67% of income for acute and specialist trusts).
  • Acute hospitals in deficit tend to be  more reliant on the national tariff (which accounts for 69% of their income on average) than those in sur (62% of income on average).
  • The value of the tariff has fallen in real terms every year between 2011/12 – 2014/15. This is largely due to the national efficiency target, which was set at 4% a year during that period, which negated any cost uplift. A lower efficiency factor of 2% has been proposed for 2016/17 – this means that the average tariff will rise above inflation for the first time since 2011.

Notes to editors:

  • The report authors conducted a statistical analysis of over 25 factors commonly believed to be associated with the financial deficit to determine which were most closely linked.
  • Six variables which showed a link to deficit were: not being a specialist trust; fewer number of hospital sites; agency cost; tariff income above average; percentage of staff responding that if a friend of relative needed treatment, they would not be happy with the standard of care provided by their organisation; inadequate CQC rating. Three variables that did not show a statistically significant link to deficit but were interesting included consistent executive leadership; e-rostering and the presence of a private finance initiative (PFI).
  • The report used a question from the NHS staff survey as a proxy for staff satisfaction. Namely, the percentage of staff who agreed or disagreed with the following statement: “If a friend or relative needed treatment I would be happy with the standard of care provided by this organisation.”
  • The report comes following another publication by the OnlyWan which showed that productivity improvements in the NHS had failed to grow for the third consecutive year.


For further information or to arrange a briefing, please Creina Lilburne in the media team on 020 1111 8027.

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