NHS funding and productivity: Key issues for the 2015 Parliament

At the start of the 2010 Parliament, the NHS was faced with the most austere funding settlement in its history.

Although the small real-terms increases in its budget were generous in comparison to other Government departments, the prospect of rising demands and costs meant that it faced a ‘funding gap’ (a potential mismatch between resources and patient needs) of £20 billion by 2014/15.

By most accounts, the NHS did reasonably well in meeting this challenge, at least in the first years of the last Parliament. But even with a relatively generous settlement in the next, another funding gap looms on the horizon and many of the easy savings have already been made.

Chart 1: Annual real-terms growth in NHS expenditure

The NHS funding settlement during the last Parliament was the most austere in its history. Average annual real-terms growth in NHS expenditure, by periods of Government, financial years 1951-2014

Chart showing the NHS funding settlement during the last Parliament was the most austere in its history

Plugging the gap

Most of the savings over the last Parliament were made by freezing staff salaries, squeezing the prices paid to hospitals for the treatment they provide, and cutting back on management costs, rather than through changes to the way services are delivered.

These savings were made even as the quantity of care provided by the NHS increased: by most measures, it was doing significantly more with each pound spent on it in 2014 than it was in 2010.

Chart 2: NHS expenditure in line with hospital activity

Doing more with the same: during the last Parliament, NHS expenditure stopped growing in line with hospital activity. NHS (England) expenditure and Finished Consultant Episodes*, 2005/06 to 2014/15, indexed, 2009/10=100

Chart showing NHS expenditure stopped growing in line with hospital activity

Quality, too, held up on many measures, at least in the initial years of the funding freeze: waiting times for inpatient and outpatient care remained low, rates of hospital acquired infections continued to fall, public satisfaction was historically high, and most patients continued to report a positive experience of care.

In 2014 the Commonwealth Fund ranked the NHS first among comparable countries for quality, access and efficiency.

At the limit?

However, by the end of the last Parliament, there were signs that funding constraints were beginning to affect performance. The sharp rise in patients waiting more than four hours to be seen at A&E during the winter of 2014-15 was characterised in some quarters as a “crisis”.

Chart 3: Patients waiting over 4 hours in A&E

Performance against the A&E target slipped towards the end of the last Parliament. Percentage of patients waiting over 4 hours in A&E departments, weekly, Jan-11 to Mar-15

Chart showing Performance against the A&E target slipped towards the end of the last Parliament

Waiting times for planned hospital admissions, too, have been trending upwards; bed availability, particularly in mental health units, is increasingly limited and the financial position of NHS providers is also worsening, indicating that some were struggling to cope with the reduced prices paid for services.

These developments call into question the ability of the NHS to manage a further five-years of budgetary constraint.

NHS England estimates that, with a similar funding settlement to that of the last Parliament, another £30 billion in savings would be required by 2020/21. Of that, the NHS Five-Year Forward View suggests that £22 billion could be achieved through productivity improvements, leaving £8 billion to be made up through additional government spending by 2020/21.

Some parties have committed to provide this (see below).

The King’s Fund, however, describes £22 billion in efficiency savings as a “very tall order” and the £8 billion as “the bare minimum in additional funds that will be required”.

This is partly because many of the opportunities for short-term productivity gains may have been exhausted: for instance, staff pay cannot be frozen and management costs cut indefinitely. And the high levels of public expectation and regulatory scrutiny of NHS providers, bolstered by NICE guidance on safe staffing levels, mean there is now less tolerance of attempts to make savings by cutting or rationing services.

Sustainable saving

The NHS is certainly not perfectly efficient, and it is likely that additional savings could be made by further reducing the length of stay in hospitals, reducing reliance on agency staff, using lower cost drugs, and improving clinical practice and procurement.

However, it is unlikely that the traditional cost reduction efforts, including those used in the previous Parliament, will be sustainable or sufficient in this one. 

In the pursuit of sustainable savings, much hope has been pinned on ‘transformational change’, and in particular the reduction in expensive hospital admissions that could be achieved through the closer integration of care services.

The £3.8 billion Better Care Fund, a pooled health and social care budget (the majority of which is coming directly from the NHS budget, resulting in what the King’s Fund describe as “a sharp and sudden reduction in hospital revenues” in 2015/16) is intended to advance this aim.

However, further cuts to local authority social care budgets may limit the opportunities for community-based alternatives to hospital; and more generally, making such sweeping changes successful is particularly difficult in straitened times.

Prospects for further integration of care services are discussed in the next article.

Party Lines

  • Conservatives: minimum real terms increase of £8bn a year by 2020
  • Greens: immediately increase funding by £12bn year rising to £20bn a year by 2020
  • Liberal democrats: funding £8bn a year higher in real terms by 2020 with budget protected until 2017/18
  • Labour: annual £2.5bn time to care fund for health and social care
  • UKIP: increase frontline funding by £3bn a year by 2020

 

Current Briefing Papers

The Key Issues articles were published in May 2015. However, the Commons Library produces new briefings as topics evolve.

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