The funding formula: age vs deprivation

Recent press reports (such as in The Independent and the HSJ) float the suggestion that NHS funds in England should be distributed to local areas solely on the basis of the age of the local population. There is a seductive simplicity to such a proposal, especially given the baroque intricacies of the current resource allocation formula. However, it would turn back 40 years of trying to secure a fairer geographical distribution of NHS funds, and would be a profoundly retrograde step.

Take the biggest block of expenditure as an example (hospital and community services excluding mental health). The documentation for financial year 2011-12 gives the allocation of funds per person in five-year age bands. For people up to age 40, local areas receive an annual amount of somewhat less than £300 per person to cover these services. The amount per person then accelerates rapidly, to £800 at age 60, increasing progressively to £2,800 at age 85 and over.

Using these amounts as a basis for distributing funds might be fine if everyone lived to the same age. An age-based formula would then simply compensate local areas for variations in demography that cause variations in current spending needs. The problem is that poorer people have much lower life expectancy than rich people, and so might never attract the higher capitation amounts for older age groups, simply because they do not live long enough.

For example, life expectancy in Manchester is 77 years compared to 87 years in Kensington and Chelsea. My calculations suggest that – if NHS funds were distributed on the basis of age alone – a person living to age 77 would receive lifetime NHS funding for acute hospital services of about £39,000, whilst the equivalent for someone living to age 87 would be £60,000. Yet all the evidence suggests that poorer people need just as many health services over their lifetime as their richer counterparts – it is simply that their need is likely to occur at a younger age.

Therefore, if demography alone were used as the basis for allocating funds, the NHS would become a massive welfare programme in favour of the well-off. Allocations would be both unfair (because they unjustifiably favour richer areas) and inefficient (because they would not direct funds where they could do most good).

It is for this reason that, since 1974, successive NHS funding formulae have incorporated additional indicators of clinical need, as well as demographic factors. To give an idea of the power of these additional factors, recent work by the Nuffield Trust suggests that, in statistical models of hospital resource use, demographic factors alone account for only 34.4% of the variation in general practices’ expenditure. Adding in needs factors (in the form of previous diagnosis) increases that explanatory power of the model to 60.8%, and even higher levels of explanatory power can be achieved by adding in further deprivation factors.

Academics, think tanks, ministry officials and many others have worked hard over the last 40 years to find a way of distributing funds to secure equal access to NHS care for equal need. Most NHS funds are now distributed according to this criterion. To achieve this, it is universally recognised that indicators of clinical ‘needs’, in addition to age, are a fundamental requirement for any funding formula.

Furthermore, this principle is recognised in some form in almost all developed health systems worldwide. Put simply, poorer people need more NHS money at younger ages than those in richer areas because they tend to become sick, use more health services, and die at an earlier age. To adopt a system of funding based on age alone would be an assault on poorer areas, and a real threat to the national solidarity on which the NHS relies. All those interested in preserving a fair and efficient NHS should resist any such moves.

Peter is Professor of Health Policy at Imperial College Business School & Centre for Health Policy.