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How well does the NHS manage its budget?

Watch Siva Anandaciva, Chief Analyst at The King's Fund, explain how we can understand the NHS through how well it manages its budget.
So if you think about how the NHS is doing financially, at the highest level, not too bad and that might be a surprising answer but the Department of Health and Social Care has managed to balance its budget each year over the last ten years, even as austerity has had a significant impact. Now that maybe surprising if you read the papers when you see financial pressures in the NHS talked about a lot and that’s because even if the Department of Health is balancing its budget, there are very real financial pressures throughout the rest of the system.
So if we look at one part of the system, providers of care, people running hospital services, ambulance services, mental health services for example, last year in 2017/18, they lost £1 billion pounds. So their costs exceeded their income by £1 billion and for some individual organisations, they were losing over £100 million a year. So some serious financial problems do exist in the NHS, even if they’re balanced by surpluses in other parts of the NHS like those held by commissioners who plan and purchase services from these frontline organisations. So overall, a bit of mixed picture.
So the current financial pressures in the NHS obviously mean there’s a keen focus on meeting financial targets, and that works at every level of the system; the Department for Health and Social Care has its target to remain within its allocated budget and that then cascades throughout the rest of the system. So if people like providers of care, providers of hospital care, ambulance services, mental health, there are about 230 of these providers and in aggregate overall, they are meant to financially balance each year, but this is proving difficult. Last year this sector lost £960 million and the year before they lost a similar amount of money. So these are challenging times.
And individual organisations are also finding these challenges because they too are set their own financial targets, and these are called control totals in the NHS. They’re your annual financial income or expenditure that you are meant to meet. And for some of these organisations, these targets have been substantially missed. For example, some organisations that were expecting to record a small surplus or break even, ended up with deficits that were up to £40 million. So at every level of the NHS we are seeing that financial targets are being set but are proving incredibly challenging to meet.
So you might wonder why is it so hard to achieve financial balance in the NHS and individual NHS organisations and there are two things going on here. Firstly, it’s that funding has reached an all time low in the NHS. We are in the middle of the most prolonged squeeze in NHS funding. Budgets in the NHS tend to rise by 4% a year above inflation but over the last decade, budget growth has been closer to 1%. So the income for organisations has been lower than expected. At the same time, costs have exceeded expectation as well.
Demand and activity in NHS hospitals and other organisations continues to rise by 4% if you look at A&E departments and even more if you look at ambulance services. So hospitals are being asked to do more, they have to recruit more staff and pay for more staff to cope with that demand but they’re not receiving enough income to meet these costs and that’s why we see such substantial pressures on NHS finances at the moment.

The performance measures you’ve learned about so far focus on the quality of health care in the NHS. How the NHS performs financially is another important way we can understand how the NHS is doing.

In this video Siva Anandaciva, Chief Analyst at The King’s Fund, explores how we can understand the NHS through how well it manages its budget. In the video, Siva talks about some big financial figures such as the £1 billion deficit across NHS care providers in 2017/18. To put this into context, £1 billion could run the NHS for about three days.

In June 2018, the Prime Minister announced extra NHS funding for the next five years, starting from 2019/20. This new settlement increases NHS funding at an average of 3.4% a year, which means that by 2023/24, NHS funding will have increased by £20.5 billion per year. The government hopes this additional funding will achieve a number of things, including eliminating deficits in NHS care providers, but there are other factors, such as recruiting enough staff, which also affect financial performance.

In September 2019, as part of the Spending Round, the government announced further funding for capital investment, public health and the education and training of the NHS workforce. This translates to a total budget increase for the Department of Health and Social Care of a little under 3% between 2019/20 and 2020/21, which is still less than the long-term average increase in funding.

As you’ve just heard, the NHS is experiencing financial pressures at the moment. If you were in charge of the NHS budget and were tasked with saving money, what measures would you take?

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