Image: Flickr/Rena Tom

The government has cut the cash it pays hospitals by over 40% for a quarter of treatments – and by over 70% for one in 10 hospital treatments, new research by False Economy for the TUC and UNISON has revealed.

On average, payments to hospitals for each treatment they undertake have been cut by 10 per cent since 2010.

Around three quarters of each hospital’s funding comes from this system, known as ‘Payment by Results’, where hospitals are paid per treatment and prices are set by a ‘tariff’.

The system was introduced as part of New Labour’s ‘market’ reforms in 2002. The theory was it enabled hospitals to compete with each other to attract patients (and the NHS cash attached to each treatment they had), and incentivised these ‘providers’ to be more efficient.

But since then, the government has added in an ‘efficiency’ target requiring hospitals to deliver the treatment at a reduced rate year on year.

The cuts to tariff payments make up nearly half the £20bn ‘efficiency savings’ (also known as QIPP savings, or the ‘Nicholson Challenge’) that the NHS was told to achieve five years ago.

The cuts are contributing to the growing financial crisis across the NHS, with alarming deficits piling up among acute providers, as hospitals struggle to provide the same service for less money.

A hospital providing straight forward, non-emergency knee surgery would have been paid £3,077 for each procedure in 2009/10.

By 2013/14, the hospital would have received £1,673 for the same procedure. A cut of 45.6 per cent.

Is it likely the cost to the hospital of providing that service has also fallen by 45.6%?

We know that in 2013/14, nearly 10,400 of these procedures were undertaken – but the money paid out to hospitals has been cut from £26.5m to just £17.3m.

And that’s just one procedure. There are over 4,000 procedures with tariffs.

You can begin to see why all the red ink is showing up on hospital accounts this year.

60 out of 83 acute foundation trusts are in the red, according to the latest figures from hospital financial regulator Monitor. The total net deficit is £438m and rising.

Income is not keeping pace with rising demand, say Monitor:

“The deficit was largely driven by unplanned growth in both pay costs (2.1%) and non-pay costs (3%) exceeding the growth in revenue of 1.5%, bringing about the decline in financial performance ... “

The problem is most severe for ‘acute trusts’ (full service hospitals with critical and emergency care), it adds:

“Acute trusts remained most financially challenged, with a net deficit of £428m at Q3 2014/15 ... whereas mental health, ambulance and specialist trusts all made a small surplus This was largely due to acute trusts being more exposed to tariff deflator and other national tariff rules.”

As tariff payments are “deflated” down, the relationship between hospitals (providers), local health bosses (commissioners) and regulators is becoming increasingly tense.

NHS finance manager Jonathan Allsop detailed last month how tariffs and Payment by Results, and the market system they service, are sapping the service culture within the NHS. He points out how these systems are corroding the spirit of collaboration and partnership that the NHS is built on.

We already know these 'market' systems require a costly and wasteful bureaucracy to administer.

And Bob Alexander, finance director of the NHS Trust Development Agency, describes a “financial arms race” with “providers tracking down every last opportunity to charge and commissioners following a strategy… fundamentally based on finding ways not to pay for stuff.”

This tension boiled over earlier this year, when hospitals led a national revolt against the proposed tariffs to be imposed in 2015/16.

Who can blame hospitals? What are officially labelled as ‘productivity gains’ rather than ‘cuts’ in the official NHS figures, often turn out to mean rising waiting lists and mounting deficits, as  John Appleby, Chief Economist of the Kings Fund, pointed out in the British Medical Journal last week:

“Official figures suggest that (the NHS) is generated £19bn in productivity gains, but around half of this saving is an assumption based on the real price cuts imposed on hospitals; it less clear that hospitals responded perfectly to the price cut by reducing costs without affecting quality, for example. Moreover, productivity plans have not been met in the past two years, and with rising waiting times, for example, quality has suffered – as have finances, with hospitals likely to record an overspend of at least £800m in 2014/15.”

And what of the future?

NHS England’s Five Year Forward View is calling for an additional £22bn in ‘efficiency savings’ to be made by 2020/21 in order for the NHS to meet increasing demand and maintain the same levels of service quality.

This will require heroic levels of productivity in the NHS that have never been found before.

Yet it is inconceivable that further savings can be found on the back of continued tariff cuts (or pay freezes for that matter!) without substantially impacting on service quality or hospital finances.

As Chris Ham, Chief Executive of the Kings Fund says “it is clear that the policy of implementing year-on-year reductions in tariff has reached the end of the line”.

We need to think about how exactly the NHS is going to find the huge savings that the Five Year Forward View is predicated on or, alternatively, consider the funding that will be required if those savings are not achieved.

These are questions that few politicians seem willing to consider right now.