NHS Finance

The jumbo jet and the postage stamp

The jumbo jet and the postage stamp When the Department of Health released the latest NHS finance figures predicting a surplus for the NHS of £1.8 billion for 2007/8 under the banner “NHS on sound financial footing to plan for the future,” the press release included quotes by the health secretary and the chief executive of the NHS which both reinforced the view that the predicted surplus is good news.

An alternative view could see the surplus as bad news. Since the money had been allocated to provide treatments to meet patients’ needs , a large underspend means that some patients were denied benefits they should have had. As John Appleby of the King’s Fund said: “An underspend by that amount will be seen as just as bad as an overspend. Parliament does not approve of large NHS underspends as it commits those resources for health spending not to just sit there.”

The health secretary was quick to point out , however , that the money did not have to be returned to the Treasury. Rather , it provides an opportunity for investing in service improvements including reducing hospital infections and delivering faster treatments. For this to be good news , though , the benefits from investing in service improvements would have to be of higher value than the sacrifices made by patients in 2007/8. This may of course be the case , but can it be right that a shift in the balance of expenditure between investing in service improvement and spending on treatments should be determined by an unplanned budget surplus rather than the more rational methods advocated by health economists?

Whilst it would be preferable for the NHS to balance its books each year , no one can realistically expect an organisation as large and diverse as the NHS to reach the end of the financial year having spent every penny allocated to it and not a penny more. David Stout of the NHS Confederation once used the metaphor of landing a jumbo jet on a postage stamp when referring to the difficulty of such an achievement. If failing to land on the postage stamp is inevitable , then deciding whether any surplus should be regarded as good or bad news ought to depend on what the Department of Health considers to be unacceptably off target and how it responds when such a situation arises.

When expressed in percentage terms , £1.8 billion is , arguably , not very far off target. As David Nicholson pointed out to the Commons Health Select Committee , the predicted surplus for 2007/8 represents only about 2% of total funding which is ‘relatively manageable’ and in his view is ‘a reasonable place to be”. Thus 2% off target is arguably neither good news nor bad news - just the NHS doing its job.

But contrast this with the reaction to the £547 million deficit only two years earlier. Since this represented less than 1% of that year’s funding , the reaction of the Department of Health could have been to congratulate the NHS on a job well done. A very different view was expressed and well before the end of the financial year i.e. even before the magnitude of the deficit was known , Health Service Journal was reporting widespread cuts already being made in trusts across the UK. The severity of the reaction to the deficit is believed by many to have been the cause of the £510 million surplus the following year and has led to the impression of a boom and bust NHS.

Since the jumbo jet will never land on the postage stamp, the Department of Health should make clear what it regards as ‘close enough’ and should put in place and apply consistently a set of mechanisms for rational responses to unacceptable deficits or surpluses.

David Cohen is professor of health economics at the University of Glamorgan

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