RSS feedsStories of the National Health Service’s collapse into financial chaos were being published on an almost daily basis earlier this year. The gravity of the problems soon gained its first scalp when NHS chief executive and permanent secretary to the Department of Health, Sir Nigel Crisp, fell on his sword in March, acknowledging his “accountability for problems” on the way.
Before doing so, Sir Nigel tried to lay much of the blame at the feet of finance staff when he said “poor financial control” was the reason for the mess the NHS had found itself in. Finance directors were, once again, in the firing line.
Financial Director has spoken to several NHS finance directors over the past few weeks to get their side of the story – and it seems the problem is far more deep-rooted than a few lazy accountants failing to add up correctly.
“The real issue is that the health economy at Sussex and most of the south of England has been in difficulty for some time,” says the FD of the former Surrey and Sussex Strategic Health Authority. “There’s been a significant underlying financial problem here for some time, for all sorts of reasons.” Surrey and Sussex has the largest deficit of all NHS trusts with debts of more than £40m. However, it started in deficit when it was formed from the merger of two hospitals in 1998.
Early diagnosis
The origins of the financial problem, according to the FDs we spoke to, can be traced back to Labour’s ten-year NHS Plan announced by Alan Milburn to a sceptical public on 27 July 2000. This would be Tony Blair’s legacy: 7,000 new hospital beds; 100 new hospitals; vastly reduced waiting times; 7,500 more consultants; 2,000 additional general medical practitioners; 20,000 extra nurses… the list went on and on.
The ambitious plan would be funded by re-routing huge amounts of public money into the NHS, and this was reflected by huge budgetary increases over the period: the Department of Health resource budget in 2000-01 was just £45bn, but by 2004-05 this had climbed to almost £67bn, and by 2007-08 – when the budget growth finally slows – it is expected to be £87bn. But this, in itself, creates a problem.
“Although it’s undeniable that the NHS over the past five or six years has received the most generous level of funding, that has created problems because the department was always able to say that there was more than enough money to do just about everything and anything they may want,” says the Surrey and Sussex FD.
This became evident when we approached the Department of Health for comment. “Resources4 available for the NHS have doubled since 1997 and will have almost tripled by 2008,” a spokesperson said.
The strategic vision at the pinnacle of the Department of Health seems surprisingly basic: throw vast amounts of money at the NHS and hope for everything to be alright. “One of my biggest criticisms of the Department of Health, and why I think it shares a lot of blame for what’s currently happening, is that the NHS plan was never costed,” says the FD.
It is an opinion shared by the former deputy FD of an NHS trust in the South of England who acted as an interim manager in both acute and primary care trusts. She says that although consultation did take place, it never went far enough – and, as a result, there were vastly different costs when projects got to their implementation stages. “On a day-to-day basis, you get asked to estimate figures for things on a very frequent basis,” she says. “[But] you’re generally given a turnaround of 24 hours and there’s a lot of difference between making an estimate on one side of A4 and then implementing something like the consultants contract or junior doctors’ hours.”
The NHS is the third-largest employer in the world (only the Chinese Red Army and the Indian Railways employ more people) so staff costs account for a huge proportion of overall expenditure – and contributed a great deal to the situation the NHS now finds itself in. “It’s one of the biggest [causes] of the current financial climate, of why some organisations are so desperately in deficit,” she says.
Power struggle
Because the NHS is such a huge organisation, the power struggles between departments and interested parties can be immense, and never was this more in evidence than when the consultants contract was negotiated. The British Medical Association did a fantastic job for its members in pushing for higher and higher pay for senior doctors at acute trusts. It did a similarly good job with GPs. However, the effect was to put a far greater strain on strategic health authority finances – a cost that the Department of Health simply hadn’t accounted for when it pledged the extra staff.
In effect, although the department had promised thousands more consultants, GPs, nurses and other front line staff, they actually had little idea how much this was going to cost. “There were no pilots for most of the new employment contracts – they just launched straight into it,” she says. Whatever the reasons for this, whether it be political pressures or a sheer lack of foresight, it set in motion a series of events which would put an intolerable strain on the NHS.
“Although it’s undeniable that there have been huge improvements in services over the past five years, particularly in terms of huge reductions in waiting times, that has all come at a significant cost,” says the Surrey and Sussex FD. “And when you add to that the cost of paying for various other things I think that the experience of all FDs is that, as generous as the public sector is, it’s actually got nowhere near close enough to meeting all of the additional commitments that have been placed on the NHS.”
There are many other reasons for why the NHS finds itself in the financial quagmire it does today (in June, health secretary Patricia Hewitt announced a net deficit across NHS trusts of £512m, discounting those trusts which recorded a surplus, the overall deficit of the 174 trusts that ended the year in the red came to a staggering £1.3bn) and the failure to properly cost the original ten-year plan was one.
What a waste
But the finance director of a PCT in the east of England points to other examples of avoidable waste within the NHS. He is in charge of a PCT with an annual budget of £200m – 15% of that budget is taken up by prescription costs (effectively the costs associated with providing prescription drugs that doctors and dispensing chemists then pass on to the public).
He says that the more popular prescription drugs come either branded or non-branded with the only difference being, apart from some fancy packaging, an even fancier price tag. The problem he faces is that doctors who own their own dispensing chemists (of which there are many, although far more common in rural areas) will order the more expensive branded variety because the mark-up is greater than non-branded, resulting in higher earnings for them, but a greater cost to the NHS. The finance director claimed not to have the power or authority to become involved and block doctors ordering certain makes of drugs, even if a perfectly good, and far cheaper, alternative is available.
Another contributor to NHS cost is the recently established payment-by-results regime where hospitals and other health providers are paid for the services they provide, rather than being handed a fixed budget. The idea behind this is reasonably sound: it’s easy to fritter away money if you don’t have to prove how you spent it. Unfortunately, it did not have the desired effect.
The deputy FD from an acute trust explained how it can go wrong: “It incentivises acute hospitals to do as much work as they possibly4 can because they get paid on a case-by-case basis. PCTs have got fixed budgets and can’t afford to pay for all of that work to be done.” She says there were instances of acute trusts doing the same amount of activity, but trying to claim more for it because they could effectively prove how much they had done.
When the Department of Health issued guidelines for payment by results, it had a section specifically focused on ‘gaming’ by acute hospitals, to make sure that they were all playing by the same rules. “What PCTs have to do is say ‘well, actually, we think you’ve been doing this activity all along, you’ve previously done these for £2m, now just because you’ve suddenly counted 150 of them doesn’t mean you can charge us £3m for them’. There are examples of this having happened,” she says.
Falling morale
There are many reasons why NHS trusts find it difficult to make ends meet as it is, but when you take into account the (“bloody stupid”) fact that deficits recorded in one year must be taken off the following year’s budget, it is hardly surprising that so many NHS trusts have found themselves in a financial quick sand they simply can’t get out of – and morale is dropping like a stone.
This morale is certainly not helped by the relationship strains between NHS organisations (one FD described it as the ‘National’ having been taken out of the NHS). “Certainly, where I was, the relationship between the acute hospital and the PCT and between the PCT and the GPs was absolutely dire; not very grown up at all,” she says. “One of the problems is that PCTs have been through such rapid change, restructuring and political interference – some sort of change every couple of years – that they’re not very mature operations, whereas the GPs have been around for ages, they all know each other, know who to talk to, who to follow. Acute hospitals are much more stable and, therefore, much more effective to fight their corner because they’re not worrying about their jobs all the time.”
So, the NHS found itself in the situation where the 303 PCTs (in effect, the guardians of that £70bn budget, responsible for allocating cash to health providers) were far less powerful than the organisations they were providing the cash to – a recipe for disaster in organisations of any size and in whatever industry, private or not.
The government’s answer? More reform. To be fair to the Department of Health, the reforms the NHS is currently in the midst of, look like a step in the right direction. The 303 PCTs are being reduced by half in October, with the aim of increasing their power so that they can stand up to the acute trusts more effectively. And the number of strategic health authorities were reduced from 28 to 10 in July in a move with similar motivations, along with the hope of cutting complexity and, one assumes, overheads. But while this may be a strategically sound plan, hundreds of finance professionals are likely to be out of work.
Bitter pill
But, will it work? Many FDs we spoke to believe that the NHS is on borrowed time: “I think if the NHS, as a whole, doesn’t deliver something close to breaking even this year – and my own personal view is that it doesn’t have much chance of doing that – then, politically, that’s going to be very damaging and they would be forced to do something quite fundamental,” says the Surrey and Sussex FD.
The NHS’s financial prospects are not helped by the rather frightening prospect of a radical slowdown in budget growth after the 2007-08 financial year. “People have known about it for a very long time, so they should be prepared, but if general inflation keeps rising as it is at the moment, the cost pressures that all NHS organisations face, in terms of wage pressures, will just eat up all of that money straightaway,” says the deputy FD.
An NHS spokesperson defends the record of the NHS and claims that the department is on course “to deliver financial balance by the end of 2006-07”. “Independent government auditors agree with us that there is no single, simple cause of deficits and no single simple solution,” the spokesperson added.
But from speaking to finance directors working at the front line of NHS reform, it seems the financial crisis has been brewing for years. In fact, the FD of Surrey and Sussex claims that the only reason we have not heard about it earlier is because the NHS has been turning to “non-recurrent” means over the past few years to balance its books. Capital funds, in particular, have been used to strengthen the NHS’ revenue position – with hundreds of millions of pounds worth of one-off land sales standing out in particular.
“The fact they’ve done that has disguised what the underlying problems are,” he says. “For it then to be portrayed as poor financial management and a breakdown in financial control I think is, to say the least, disingenuous.”
