Why hospitals are struggling

Inside the NHS

To state the obvious, the NHS in England is in financial difficulty - more than a quarter of NHS trusts reported financial deficits in 2005. On the face of it this is surprising. After all, in recent times the health service budget has been growing by roughly 7.5 per cent in real terms annually - and over the lifetime of this government the increase is enormous, from £34bn to £92bn. So why has the Department of Health had to send turnaround teams of management consultants into such a generously funded system?

Much of the extra cash has gone on salaries. New nationwide contracts have left British GPs at the top of the international pay league, and consultants and nurses are in pretty much the same position: more pay has probably consumed at least half of the additional money for health this year. On top of the impact of an ageing population are a drugs bill rising by between 7 and 12 per cent a year, lower medical productivity caused by the European Working Time Directive, extra staff and larger clinical negligence claims. Nor is any of this helped by the way NHS finances are calculated. Hospitals have to pay a public capital dividend, a fixed return on capital employed. Although sensible, this dividend is treated like a debt and is deducted from the operating surplus, contributing to the now much-talked-about deficits.

Hospitals landed with a private finance initiative carry an additional burden - they are carrying what amounts to a huge mortgage that they cannot renegotiate. The health service has locked itself in to buildings for 30 years that could be unfit for purpose in five.

Some problems do reflect inefficiencies.

The Healthcare Commission estimates that more than 70,000 in-patient operations could be done as day cases; and many hospital admissions could be prevented with better treatment in the community. However, many difficulties reflect past decisions, which are hard to remedy quickly. As if all this were not enough, hospitals have been told that the old brokering arrangements, whereby one part of the health service bailed out another, will no longer operate. Add to this market-style incentives that will bear down on

hospitals with higher-than-average costs,

and it is small wonder there are some ashen-faced hospital executives around.

Under this new regime, hospitals with relatively high costs have been put under immediate pressure, but next year the government will go further - to push services out of hospitals and into the community, it is allowing only very small increases in tariff prices, with the aim of taking out at least £2.5bn from the hospital sector. This is what the civil servants in Yes, Minister used to describe as a "courageous" decision. If, in the coming year, financial fires break out all over the health service, expect the left to blame the market, the right to claim that the NHS is unreformable, and the government to run for cover.

The writer is chief executive of the King's Fund