The key ingredients for a sustainable NHS: long term-investment and productivity growth

As the NHS braces for another highly pressured winter and waiting lists continue to rise, two key issues have moved centre stage. Why is recovering activity proving so difficult when the NHS has more money and staff? And how can the NHS be at serious risk of running out of money when funding has increased substantially since the pandemic? 

Less for more?

While the NHS has almost a fifth more staff now than 4 years ago, the amount of hospital care it provides is broadly no higher than pre-pandemic levels. Figure 1 shows how NHS funding, staffing and hospital admissions have changed in the years before the pandemic and since 2019/20. Growth in outpatient appointments has not kept pace with the increase in funding or staff since the pandemic, and hospital admissions remain below pre-pandemic levels. While other types of care (for example, GP appointments) have increased more rapidly, hospitals services are an important part of the care the NHS provides, and NHS constitution standards are not being met.

The Office for National Statistics (ONS) measures health care productivity as the amount of output (that is, the amount of activity funded by the NHS in hospitals, mental health, community, diagnostics and primary care) relative to the volume of inputs used to deliver that care (staff numbers, goods and services bought). It finds that productivity fell sharply during the pandemic. In 2021, productivity was a fifth lower than pre-pandemic. The ONS’s latest estimates show that while productivity is now improving, by the end of 2022, it was still around 5% below the 2019 level. The government has commissioned a review of public sector productivity, as the health service is not alone in taking time to recover from the pandemic. 

The reasons are complex, and many reflect fundamental fault lines in the resilience of the health system going into COVID-19. Our work shows that the average time patients stayed in hospital was longer in 2022 than pre-pandemic, with 800,000 fewer patients admitted as a result. A number of factors are likely behind this, but our new analysis, published soon, finds that COVID-19 is a significant factor.

Diane Coyle, Bennett Professor of Public Policy at the University of Cambridge, gave this year's REAL Centre annual lecture. As she highlights, the NHS is fundamentally undercapitalised. The health service is operating with an inadequate, out-of-date and poorly maintained physical and digital infrastructure. Adding more people into that system would tend to reduce productivity. It isn't that more staff aren’t needed; there are currently over 110,000 vacancies in the NHS and the long-term workforce plan highlights the need to significantly increase the number of staff over the next 15 years. But if patients and taxpayers are to see the benefit of extra staff, the increase will need to be accompanied by a transformation of both physical and digital infrastructures. 

For many years, health care investment in the UK was significantly below other OECD health systems. NHS capital spending is now rising compared to pre-pandemic levels, but that will take time to make a difference. The investment is necessary, but as Diane Coyle highlights, realising the benefit of new technology is patchy across the economy. While new technology has transformed productivity for some firms and sectors, large parts of the economy are not reaping the potential rewards. This highlights the importance of high-quality strategic management and well-aligned frameworks of performance and resource management. Work the Health Foundation supported earlier this year from the Institute for Government and Public First shows that both these need attention in the NHS. 

The return of deficits?

The second issue dominating health policy and Integrated Care Boards across the country is the return of deficits and worries about money. Inflation is at the root of the NHS’s financial problems. The cash increase into the NHS since 2019 has been huge, almost £40bn, taking the NHS budget for day-to-day running costs from £122bn in 2019/20 to £161bn in 2023/24. This is a nearly a third higher than just before COVID-19. 

But there is a large part of what economists call 'money illusion' in these headline figures. The government's official forecasters – the OBR – published new estimates of whole-economy inflation at the Autumn Statement. At the start of the cost-of-living crisis, rising energy bills were a key driver of inflation, but inflationary pressures are now shifting. The OBR’s estimate of whole-economy inflation over the last year has been revised upwards – wages across the economy have risen by more than expected. The latest data show public sector earnings now growing by more than inflation and private sector earnings. This is a significant change compared to recent years. Since 2010, except for the COVID-19 years (2019/20 and 2020/21), public sector earnings have grown more slowly than in the private sector and lower or only on par with inflation.

Between 2019/20 and 2022/23, funding for the health care system as a whole grew by 5.6% a year in real terms. This is much higher than the rate of funding growth in the decade before the pandemic and the long-term trend. The government set spending plans for 2023/24 and 2024/25 when inflation was expected to be much lower than the OBR’s latest forecast. If current spending plans for this year and next hold, spending on the health system will actually fall in real terms, and over the parliament as a whole (2019/20 to 2024/25), health spending would rise by an annual average of 2.6%, well below the historic average. We have updated our analysis of trends in NHS funding to reflect this. 

Difficult choices ahead for the next government 

The Chancellor resisted calls for extra money for the NHS for this year, and there has been a very painful process of reprioritisation and planning to try to prevent the Department of Health and Social Care spending more than has been voted by parliament. Whatever 2024 holds, the economic forecasts show that the Spending Review after the general election will involve extremely difficult decisions. Overall, forecast public service spending will increase by around 1% a year in real terms between 2024/25 and 2027/28. Almost all economic analysts agree this isn’t credible. Recovering the NHS and public services, and meeting the needs of an ageing population, will require additional spending over the next parliament. How can an incoming government square extra spending with the fiscal ambition to see debt fall? This all points to the need for taxes to rise at some stage. However, with overall tax receipts as a share of GDP projected to be 37.7% in 2028/29 – the highest share since 1948 – there are no easy options.   

In 2024, the REAL Centre will produce new projections of demand and funding pressures over the longer term. Improving NHS productivity will be more important over the next 5 years than ever. At the REAL Centre, we are beginning a major programme of work on productivity. We start with a focus on improving measurement and will be launching an ITT for new thinking on how to measure health care productivity. 

In the decade before the pandemic, the government held down pay and cut capital investment and prevention to try to protect NHS performance and access. Even before the pandemic, this approach had run out of road and was looking increasingly short-sighted. Trying to pull those same levers a second time is neither realistic nor desirable. This leaves an incoming government with an incredibly tough choice: either reduce the level of care on offer from the NHS or increase funding over the long term to meet underlying demand and cost pressures. Improving NHS productivity has to be a priority. Funding needs to be spent differently, with more priority also given to prevention, primary care, capital, workforce and harnessing the huge opportunities from digitisation and new technologies. But there isn’t a sustainable future for the NHS without stable long-term funding growth to keep up with the pressures from an ageing population with rising levels of long-term ill health. 

Anita Charlesworth (@AnitaCTHF) is the Director of Research and the REAL Centre at the Health Foundation.