The NHS thinks it is having a tough time financially. But this is just the beginning of a long-drawn out process of adjustment as the UK falls into an economic abyss.
These exceptional times actually give the NHS an opportunity to re-engineer a healthcare commissioning and delivery system that will truly be “built to last” and able to cope with future changes.
We heard recently that the longest and deepest post-war recession was over, thanks to a staggering 0.3 per cent uplift in GDP growth after six quarters of decline. This claim is an insult to our collective intelligence. Not only is the figure statistically insignificant, but the claim that we are back on a growth path completely ignores the fundamental, grisly realities of our economic situation.
The UK is in fact accelerating towards bankruptcy.
Our national debt, until recently one of the lowest in the developed countries, is now among the highest, once off-balance sheet obligations are included. Our economy is structurally unsound, with an over-dependence upon financial services and insufficient industrial base to support our 60 million population. Tax revenues are plummeting. The world’s largest bond investor (PIMCO) has refused to buy our government bonds and describes our national finances as “sitting on a bed of nitro-glycerine”.
Along with the nations on the fringe of Europe (Portugal, Italy, Ireland, Greece and Spain), we face downgrades in the quality of our government bonds. This will inevitably lead to an international buyers’ strike and higher interest rates, squashing any hopes of recovery.
None of this is a surprise to students of long-term economic cycles. Many commentators, mostly in the investment field (rather than many mainstream financial journalists, with vested interests) have been warning of a huge “super-cycle” downturn, to rival the great depression of the 1930s. Some call it the “Greater Depression”, already measurably worse than the last one. The depression has already begun, and has many more years to run.
This period of economic history will be studied intensively by future generations of economic historians, all asking how we could have got into this mess.
The answer is quite simply that we all borrowed too much, and the debt mountain has reached extremes never before recorded in economic history. The financiers also invented new obligations, such as the derivatives trade. This toxic monster is currently valued at $600 trillion (£390 trillion) – 10 times larger than the annual output of the entire world economy.
Only a tiny proportion of derivatives failing would wipe out the banks’ capital and this would be on top of the huge losses yet to come from many sources, including commercial property, bankrupt companies, Eastern Europe, and a monumental property bubble in Dubai.
The dam began to burst in 2007, world trade fell calamitously and the international financial system came within a few hours of total collapse in 2008.
By early 2009, a massive international government bail-out of a corrupt and inept banking system caused investors to believe that the worst was now over, and that recovery could commence. Unfortunately, the 50 per cent leap in global stock-markets during 2009 was a classic “suckers rally” which is doomed to be extinguished. There was just such a rally in 1930, which was followed by a 90 per cent stock-market collapse over the next two years. There is every likelihood of another major stockmarket panic in 2010/11.
No money left
How can the UK government bail out the banks next time? There is no money left and little ability to borrow more. And we still have to finance the welfare state. Demands are rising while funding resources are shrinking.
The top market analysts are currently predicting that the stockmarkets and the economy will hit the ultimate low around 2014-15. So we probably have several more years of severe economic pain to endure before the financial markets and the international economy stabilise at a significantly lower level.
While it is always tempting for an economist to devote many more pages to this subject, the purpose of this article is to alert NHS managers and clinicians to the fact that we live in very perilous economic times.
We know that the NHS is the jewel in the crown of the welfare state. The key question facing us all now is how to we get through the next few years with a well-functioning NHS when massive spending cuts are going to be forced on governments.
Governments will not be able to keep borrowing their way out of this crisis. Neither can they print enough money (it is not free and adds to the debt burden). During the election period, no party is going to want to admit this. After the election, all parties will have to face up to reality. In fact, it might be preferable for a coalition government to be formed to deal with a national economic emergency, which will in many respects feel like wartime for the beleaguered ordinary citizen.
While analysts who present this picture are often accused of being pessimists, this is far from the truth and not the point of the exercise. Investors who understand these facts have already protected their wealth, and some traders have made fortunes as the markets have collapsed.
The equivalent for the wise NHS manager is to “face the brutal facts” and find creative ways of dealing with the impact of the wider economic crisis. If we see the crisis as an opportunity to flush out waste and obsolete working practices from the health delivery system, then everyone will ultimately benefit and the NHS will survive and prosper.
The good news for the NHS is that there is quite a lot of accumulated fat in the system, which has never been subjected to hyper-competitive commercial pressures. We could get a long way with a benchmark uplift in productivity of the whole system of 20 per cent over the next two years, to be followed by continuous quality improvement to squeeze out further efficiencies over time.
This will require all parts of the system to co-operate for the common good, and for frontline staff to be fully involved in identifying scope for efficiency improvements. It is not the case that cost-cutting automatically reduces output quality. It is entirely possible through process improvement and stripping out unnecessary overhead to improve quality and reduce costs at the same time.
For example, a pathology service operating through networks can eliminate a lot of unnecessary and expensive facilities while improving access to sub-specialities to support clinicians. Streamlining the interface and operational protocols between primary and secondary care can push patients out of large hospitals and into community settings where they are appropriately treated at less cost.
One of the benefits of an economic crisis will be that it will unlock political problems that currently prevent health reforms from taking place – for example re-configuring hospital services to downgrade some hospitals from distric general hospitals while investing in centralising services, particularly in major cities.
It has been remarked that no good crisis should be allowed go to waste. Politicians and NHS managers will find it easier to defend necessary system changes when the public is aware of the brutal economic realities affecting their incomes and daily lives. The NHS could also lobby government to change the legal framework to allow necessary service reconfigurations, for example by reducing the requirements for public consultation.
There are several practical steps that managers and clinicians can take now to prepare for the storm, rather than be taken unawares when it breaks over the next year or so. Actions and key questions to address include:
- openness and direction from the leadership of healthcare organisations about the challenges to be faced and the need to work together to solve them
- a contingency planning approach – looking at realistic “what-if” scenarios around significantly reduced budgets, which may happen unexpectedly mid-year rather than through the normal annual planning cycle
- a root and branch review of services – what are we good at that we should be doing more of – what is marginal that can be given to other providers who can do a better job?
- do we have enough information about what services cost and how effective they are – if not we need to get it quickly (start with the basics and continually improve)
- are we engaging staff at all levels to ensure that they are behind the attempts to improve productivity? How will we engage with people who might oppose necessary changes?
- are we really performance managing staff or just going through the motions? Do people at all levels understand their personal objectives and how they fit into those of their service delivery unit and the wider organisation?
- is our management up to scratch, and if not how are we going to improve it?
- a zero-based budgeting approach – not the same as last year minus a bit but a fundamental review of what we are doing and why, with determination to drop activities that do not add enough value
- can we re-engineer or re-negotiate supply chains to deliver more value (just because we have a contract doesn’t mean it can’t be changed)?
- what are we really doing to maximise synergies between different public services, notably health and local authorities. Where can we get scale economies?
The above list is not new to the NHS, what may be new in some quarters is a necessary determination to put it into concrete action! On the plus side, all of these challenges were faced by British industry many years ago, and we ended up with some world-class businesses as a result of companies going through the fire of two major recessions in the early 1980s and 1990s.
A full-on depression in this decade will allow us to make necessary changes in the NHS that have been deemed both politically and operationally difficult or impossible until now.
Peter Cutler is an economist and financial adviser