The great NHS ‘deficits’ con

With the hospital ‘deficits crisis’ dominating the headlines, amidst claims that increases in NHS funding have been eaten up by pay and other cost increases, Colin Leys continues Red Pepper’s exposure of what is really happening in the health service.

May 1, 2006
8 min read


Colin LeysColin Leys is an honorary professor at Goldsmiths University of London. He is the author of Market Driven Politics: Neoliberal Democracy and the Public Interest and, with Stewart Player, The Plot Against the NHS (Merlin Press, 2011).

According to a King’s Fund report issued in February this year, in 2006-07 ‘nearly 40 per cent of the £4.5 billion cash increase for NHS hospital and community health services [in England] will be absorbed by pay increases’, with a further 32 per cent of the extra cash being taken up by higher prices and other cost increases. ‘This leaves 28 per cent of the increase – £1.26 billion – to be spent on other developments, in particular, meeting waiting times targets and other government priorities,’ it added.

The media instantly converted this into a story about how the big increases in NHS funding have been largely swallowed up by greedy doctors, nurses, ambulance staff and the rest, so that instead of further improvements, the NHS finds itself mired in a ‘deficits crisis’, requiring drastic cuts.

But what are the facts?

In September 2005, half-way through the government’s five-year programme of planned increases in NHS funding, the NHS Confederation, representing 90 per cent of all NHS organisations, analysed where the money was going. Its main conclusion was that ‘the impact of underinvestment in the NHS during the 1980s and 1990s seems to be much greater than was first anticipated. Much of the “new” money has had to be used to compensate for previous cost-cutting …’

Renovating badly neglected hospital buildings, replacing outdated equipment and meeting rising drug costs had absorbed some 30 per cent of the new spending. Another 30 per cent had had to be spent on improving staff salaries. This, the Confederation pointed out, would save money in the long run. For example, the gap between NHS and agency pay has been draining the NHS of nurses, forcing hospitals to hire them back through agencies at much greater cost.

The low pay of NHS support staff had also become unsustainable. ‘Agenda for Change’, the new NHS employment deal negotiated with Unison, began by raising hourly rates for the lowest-paid workers from £5.16 to just £5.67. With 1.3 million people employed by the NHS, the £2 billion pounds spent on raising their pay and pensions in 2004-05 was by no means lavish. And with better pay, and almost 90,000 additional staff recruited since 1999 (largely thanks to the new funds), the NHS’s performance was actually improving dramatically, the NHS Confederation’s chief executive noted.

The government’s estimates for 2006-07 cited by the King’s Fund really tell the same story. But if the new money hasn’t all gone in excessive pay increases, and if there are still two more years of major funding increases to come, why are there any deficits at all? And at barely one per cent of the total NHS budget, why are they so important as to bring about the closure of NHS services across the country, depriving patients of care and costing the jobs of thousands of NHS workers?

The reality is that the deficits are a creation of the government’s determination to replace the English NHS as an integrated public service with a health care market in which large for-profit corporations compete – on highly privileged terms – for NHS funds.

To see how this is so we need to begin by noting that we don’t hear about a ‘deficits crisis’ in Scotland – where, incidentally, NHS pay increases have been exactly the same as in England. This is not due to the famous thriftiness of the Scots, but to the fact that in Scotland the purchaser-provider split has been abolished and services have been reintegrated. This means that any overspending in one area can be offset by savings in another, and the overspending corrected without a crisis, as it always used to be in England. It is only in England that every hospital trust is now required to carry any overspending on its own books – and told that in the next year it must both eliminate the overspend, and pay back its entire accumulated debt from this year. (Managers refer to these instructions as ‘P45 targets’ – miss them and you’re out.)

The reason is that moving to a health care market in England means that hospital trusts are going to face massive new financial uncertainties and risks. First, ‘payment by results’ (that is, paying hospitals for every individual treatment, after it is completed), coupled with ‘patient choice’, means they can’t know in advance what their income is going to be. Second, a significant part of the current hospitals budget is to be transferred to the primary care budget, much of it destined for for-profit providers. Third, private sector bosses have been told that by 2008 as much as 40 per cent of the work carried out by private hospitals and treatment centres will be paid for out of the NHS hospital budget. Mean-while, all trusts have been told to make 2.5 per cent ‘efficiency’ savings every year …

Many hospital trusts’ difficulties are compounded by the extra costs of the Private Finance Initiative. And underlying the financial difficulties of all of them are the huge – and still growing – ‘transaction’ costs of operating in a market. In the US these account for at least 20 per cent (and in the for-profit sector as much as 50 per cent) of hospital budgets.

In England, as one primary care trust (PCT) manager put it recently, ‘NHS hospitals [now] need an army of data clerks and managers to run payment by results, making sure that every visit to hospital is counted and coded and billed. PCTs also need an army of data clerks and managers to spot the tricks that the other army is using to bump up the price of the visits.’ Not to mention the impending costs of marketing, advertising, management consultants, lawyers, and so on, and so on. In the NHS these extra costs must already total several billion pounds, and are a major underlying cause of the financial stress now being felt throughout the service. The government, however, never refers to these costs, and provides no details of them.

So trusts are being told, in effect, to become ‘lean and mean’ businesses like the private ones they are being made to compete with. Patients’ needs become secondary, however bitterly doctors and nurses object – and however much Patricia Hewitt protests it isn’t so. Across the country hospitals, wards and beds are closing and staff and service cuts are being pushed through, as trusts try to shed whatever is ‘unprofitable’. (Anyone who doubts this should look at the news round-up on the keepournhspublic.com website.)

All sorts of new inequalities are emerging, too, but they are going officially unmonitored and largely unreported. Free care at the point of access is already being eroded as desperate NHS finance directors try to ‘generate’ extra revenue by charging new kinds of ‘top-up’ fees. The government has not stepped in to ban this, and the Social Market Foundation and the far-right think-tank, Reform, are stepping up their calls for patient charges to be imposed across the board.

The truth is that the NHS is being re-designed to fail. It is convenient for the government to represent the ‘deficits’ as showing that the NHS is failing, when they are really a symptom of the costs of marketisation. And attributing them to financial mismanagement or greedy staff is handy too, because it silences some of the very people who can best defend the NHS. It also allows the government to renege on wage settlements, as they have done with the consultants’ contract. Meanwhile, the government is creating further divisions across the NHS by giving hidden subsidies to some areas and services, while others are left to go to the wall. It then points to inequalities to justify channelling money to private corporations in fields or areas it claims the NHS cannot serve.

And the clamour about ‘deficits’ diverts attention from the most astonishing – and shameful – fact of all: the government’s idea that marketising the NHS will improve it is not based on evidence, but on ideology.

All the evidence points the other way. A rational policy would abolish ‘payment by results’ and market bureaucracies, get rid of the real ‘producer interests’ – the interests of the shareholders in companies like Capita, Netcare, UnitedHealth, Dr Fosters, KPMG and hundreds of others that are now working to dismember the NHS – and go back to giving absolute priority to the public interest in an integrated, comprehensive, equal and publicly-provided health service.Where’s the money going?, King’s Fund Briefing by the Fund’s economist, John Appleby, 3 February 2006. Available online at www.kingsfund.org.uk/news/briefings/wheres_the.html

Historic underinvestment in the NHS “grossly underestimated”’, NHS Confederation report, Medical News Today, 30 September 2005.


Colin LeysColin Leys is an honorary professor at Goldsmiths University of London. He is the author of Market Driven Politics: Neoliberal Democracy and the Public Interest and, with Stewart Player, The Plot Against the NHS (Merlin Press, 2011).


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