Sharp rises in oil and food prices are hitting the NHS hard, with energy and catering bills for big trusts in the millions and the situation likely to get worse. Alison Moore reports

Anyone who has filled up their car or done the weekly shop recently cannot have failed to notice that prices have risen steeply.

Over the last year food costs have soared by up to 15 per cent and the costs of some fuel by even more. NHS staff may be feeling that in their pockets, but their employers are not immune to the same inflationary pressures.

It is hard to pin down exactly what that means for trusts in general, but for big acute trusts in particular, the extra bills can run into millions. What is certain is that food, energy and fuel costs are rising at far more than the headline inflation figure - the consumer price index - which is currently at 2.5 per cent.

A money-saving website recently said the cost of a basket of staple foods had risen by 15 per cent since April 2007. Rice, wheat and milk products have risen particularly significantly. The cost of transporting and cooking food will also have gone up. Hospital Caterers Association chairman Neil Watson-Jones estimates that food makes up around 40 per cent of NHS catering costs and the food bill is currently rising by 6 to 8 per cent per year.

The price of crude oil has risen even more sharply: in late April it hit $120 a barrel, from $72 a barrel last April and just $30 a barrel in 2001. Petrol pump price rises have been less sharp - a litre of unleaded has risen from 90p to around£1.10 over a year.

Many NHS organisations buy their gas through the NHS Purchasing and Supply Agency, which has a mix of longer and shorter-term contracts for it. This helps the NHS avoid the full impact of price spikes. It also offers customers the choice between fixed and floating prices.

The purchasing agency's category manager, Faye Lyons, says wholesale prices for gas are now around 120 per cent higher than a year ago. However, that does not mean the NHS is facing increased bills at that level, as the agency buys over the year. "Spot" prices tend to be volatile.

But the generally higher prices paid for gas recently will also affect the price of electricity. "All fossil fuels are very expensive at the moment - there is no alternative source of generation that is going to deliver a lower cost," she says.

In-year increases

How is the NHS coping with these increases? Undoubtedly, they are putting pressure on budgets, with some departments being forced to ask for increases after budgets for 2008-09 have been agreed.

Catering departments are being badly hit, with costs of energy for cooking and food ingredients both increasing. Mr Watson-Jones, who is catering manager at Worcestershire Acute Hospitals trust, says the amounts involved can be substantial: a big trust may spend£1.5m-£2.5m a year on catering. He has had to go back to his board to ask for an in-year increase to reflect more recent price rises, which happened after the budget was agreed.

"Most trusts will put extra money in if the managers can really prove there are cost pressures," he says.

There is little flexibility in what hospitals can provide, as changing menus can take a long time and nutrition has to be a primary concern. There may be savings around changing suppliers, but these tend to be marginal.

Staff meals are slightly easier to change - and to charge more for. But Mr Watson-Jones points out that hefty price rises can be counter-productive and may drive staff away.

External caterers, which typically have contracts with trusts lasting five to seven years, are also being hit. Their payments may increase in line with the general level of inflation, but this is below the rise in food costs, and they are also having to bear increased transport costs.

A spokesman for ISS Mediclean, which buys£30m of food each year for its NHS contracts, says contractors have limited flexibility, as contracts specify minimum nutritional standards and a number of choices offered to patients. "We have to live with the contracts we have and absorb as much as we can," he says. In some cases the company has been able to work with suppliers to rationalise production - reducing the number of different types of sandwiches made, for example.

The rising costs of food are dwarfed by what has happened to energy costs. Over the last two or three years, these have doubled, says Health Estates and Facility Management Association vice chair Steven Warren. His own trust, Harrogate and District foundation trust, has seen its costs double from£500,000 to£1m a year.

The rising costs of lighting and heating may have one beneficial effect, however. There is an added incentive for trusts to look at schemes to cut energy use and to move to greener alternatives.

Ms Lyons says NHS organisations are looking at how they can reduce energy consumption. "The gas price increase a couple of years ago really brought energy back on everyone's agenda," she says. "There has been a real increase in activity around energy efficiency - monitoring consumption and looking at where it can be reduced."

Mr Warren says boards are generally supportive if a good business case can be made to invest in schemes that will bring down costs. Popular schemes include combined heat and power units and groundwater heat plants. Good schemes can pay back the capital investment within three years.

The government pump-primed some carbon reduction schemes recently but more ringfenced support would help, says Mr Warren. Although the motivation may be to reduce bills, many of these schemes will also reduce the organisation's carbon footprint.

Pennine Acute Hospitals trust - which spent£4.5m on energy last year and is predicting a bill of£6.3m for this year - has worked with the Carbon Trust to identify ways of saving energy. It is now investing£200,000 in a variety of measures, including recovering heat from the laundry to heat other hospital areas.

Director of facilities John Wilkes says: "We are confident the actions we take will make a real, recurring impact on costs. This won't just be a saving in terms of price, but in reducing our carbon footprint.'

Ambulance services have seen the direct effects of the rise in fuel prices. South Western Ambulance Service trust recently calculated that every 1p per litre rise in fuel prices cost it£27,000. London's service has seen its fuel and oil bill rise from£296,000 in April 2007 to£391,000 in February 2008 - a month for which it had budgeted£286,000.

A London Ambulance Service trust spokesman says: "Commissioners are funding a limited general element to cover cost pressures, including an estimate for fuel price increases.

"We will be continuing to monitor the fuel price situation closely throughout the year."

There are also knock-on effects for staff - who are already feeling the impact of prices in their personal lives. NHS workers who use their own cars for work are still paid at a rate determined in 2002, when petrol cost 75p a litre. Although petrol costs are only one component of the overall rate paid, many staff feel that this rate is not keeping up with their rising costs - 96 per cent of nurses surveyed by the Community and District Nursing Association expressed concern that there was a shortfall between the amount paid and their costs.

Long-term fears

The price increases are not yet at the level where they are likely to threaten the finances of the NHS this year - especially as many organisations seem to have broken even or made a surplus. But there may be longer-term effects.

The Department of Health is in the first year of a three-year settlement agreed with the Treasury, which gives it 4 per cent real growth per year. If the NHS is facing higher inflation than that used to uplift the payments, that 4 per cent may be eaten into by increased costs.

Many people argue that the NHS has not seen the full impact of inflation yet: some of the food and transport costs are still working their way through the supply chain.

Some trusts with private finance initiatives may be protected by contracts that have some time to run - for example, Dartford and Gravesham trust is on a fixed-cost catering contract until July 2010. But as soon as they hit "break points" where elements of these are renegotiated, they may face substantial increases - although they can then choose other suppliers.

Future contracts for catering are likely to reflect higher food and fuel costs. Contractors may also push hard for more flexible contracts in which major unexpected changes in input prices may result in additional payments. Trusts have resisted this in the past because they do not want a situation where their income is fixed but their costs can move upwards.

There may be greater pressure for cost-cutting in catering, although this would run counter to pressure to improve all components of the patient experience.

These pressures may be putting up trusts' costs by perhaps an extra 1 per cent per year; in theory, the payment by results tariff ought to reflect this. But few are optimistic of an uplift that will include it.

The greatest impact may be on staff: where they are feeling the pinch from increased prices and fixed incomes, this may fuel demands for higher pay settlements.

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