It's the workforce, stupid: or what's really going on with the deficit

That NHS finances are in a diabolical state is beyond dispute – a £2.3bn provider deficit in the first nine months of the financial year is as serious as it gets. The key question is, why? We ask this not so we can play the blame game but because understanding the root cause of the deficit is the key to fixing it.

The headline cause is obvious: costs rising much faster than income as five years of austerity take their toll. National funding decisions have been made which mean that health spending per head of population has remained broadly constant in real terms, in contrast to many countries in Europe. At the same time the NHS is experiencing soaring agency bills, rising demand and providers running out of ideas for efficiency savings to bridge the gap.

At the Health Foundation we’ve spent the last few months analysing the accounts data to see what is going on behind the headline figures to explain this trend and today publish A Perfect Storm: an impossible climate for NHS providers’ finances? We’ve looked at the finances of acute and specialist hospitals and used regression modelling to explore what factors are associated with poor financial performance

Deficit drivers

Our analysis finds that organisations with a high proportion of their pay bill going on agency staff coupled with more of their income being paid through the payment by results tariff rather than negotiated prices are associated with being in deficit. We also find that poor quality ratings either from the Care Quality Commission or the hospital’s own staff are associated with poor finances. This is not causation, our analysis can’t tell us if finances cause quality problems, quality problems cause finance problems or as is most likely, they are bound up together in complex interconnected ways.

In one way it might seem reassuring that the drivers of the deficit seem to be linked to problems which government would argue it’s already fixing: the agency cap designed to deal with the pay bill pressure and in 2016/17 the PbR tariff is finally going up rather than down. But, and it is a very big but, further understanding of the problems highlights just how partial these apparent solutions are.

Looking first at the pay bill, the National Audit Office and NHS Improvement (Monitor/NHS TDA of old) both recently produced must-read reports on the supply of clinical staffing. Agency caps help if the problem is primarily one of the cost of labour. In fact, this is a symptom of a wider problem, namely the mismatch between the demand for nurses and supply.

The numbers of nurses in training hit a decade low in 2012/13 with just 11,509 starting their three-year course. That number has now increased but it is still 20 per cent below the numbers being trained a decade ago. It is also much less than the number of nurses leaving the NHS each year, which the NAO estimate at over 25,000 in 2014. Moreover, international recruitment fell - particularly from outside Europe - and return to practice schemes are delivering a fraction of the numbers needed in the early part of this century.

Significant catlysts

Hospitals are looking to employ more nurses and this is often attributed to the impact of Sir Robert Francis’s report, and the consequential focus on staffing ratios and a new CQC inspection regime. These changes were obviously significant catalysts but a closer look shows that we are not in the midst of some unprecedented level of nursing care.

The chart below from NHS Improvement shows what has happened over the last five years to the ratio between nurses and patient bed days. We see that by the start of 2015 the number of nurses per patient bed day was still below that in 2011. What happened – which was exceptional and proved unsustainable – was that nurses per bed day fell between 2011 and 2013, probably as a result of the system working to demand management assumptions which were unrealistic and undeliverable.

Worryingly, Professor Ian Cummings, chief executive of Health Education England, told the Public Accounts Committee last week that the NHS would be short of nurses until 2019.

This fundamentally flawed workforce plan is reflected in the problem with the tariff, which required the NHS to deliver efficiency savings of 4 per cent a year over recent years. With population fuelled activity continuing to grow but funding flatlining, the NHS needed unprecedented efficiency improvements to bridge the gap if it was to avoid reduction in the range and/or quality of services provided by the NHS. Much of that saving was to come from pay bill savings – savings which were undeliverable.

Lord Carter’s report is a great start, but why oh why do we only have this sort of depth analysis in 2016? It’s six years since David Nicholson first identified the need for massive savings across the NHS

As a result, efficiency growth has been much more modest – Monitor estimates it at 1.4 per cent a year up to 2013/14. The Health Foundation recently analysed crude hospital productivity and found it to have fallen; by almost 1 per cent last year. What this points to is the need to look more fundamentally for savings. Lord Carter’s report is a great start, but why oh why do we only have this sort of depth analysis in 2016? It’s six years since David Nicholson first identified the need for massive savings across the NHS. And where is the practical support to organisations to implement the sort of changes Carter sets out?

The problem in the NHS is not a lack of will – everyone wants to do a good job and use money wisely. But this sort of improvement work is difficult and takes time. Lord Carter’s review finds scope for £5bn of savings and the NHS needs to find £22bn (and extra now to make up for the deficits). While there is scope to do more, the unpalatable lesson from the past five years may well be that there simply isn’t enough money to do everything, even if the health system plays a blinder on efficiency and productivity.

Anita Charlesworth is director of research and economics at the Health Foundation.