Published 28 October 2008, doi:10.1136/bmj.a2259
Cite this as: BMJ 2008;337:a2259

Feature

Health Economics

The credit crisis and health care

John Appleby, chief economist

1 King’s Fund, London W1G 0AN

j.appleby{at}kingsfund.org.uk

With the current financial turmoil affecting the cash flow of governments, business, and individuals, John Appleby assesses the likely effect on the NHS

It is hard to resist apocalyptic phrases (indeed, the use of the word apocalyptic) in describing the effect of the credit crunch on the world’s banking and financial systems over the past year. But it is not just the somewhat unreal and mystifying world of credit default swaps, naked short selling, and eyewatering bonuses that has been affected. As has become much clearer in the past few months the scale of the seizure in wholesale credit markets is such that the effects are being felt in the real world.

As the government commits potentially hundreds of billions of pounds to supporting banks and guaranteeing depositors over the next few years, borrowing huge amounts in the process and pushing national debt to over half the UK’s gross domestic product, it is hard not to foresee some effect on public services. What, then, might be the immediate and longer term prospects for the National Health Service and, indeed, the nation’s health?

As the speed and scale of the unfurling of the credit crunch has shown, predicting the future is not an easy task—even for those with a substantial personal financial risk at stake. Nevertheless, the short (and short term) answer to the question of the direct effect of the crisis on the NHS is that it will, with some qualified hedging, be minimal. However, the longer (and longer term) answer is more complicated.

Short term: scarce credit and lost deposits?

In the short term the credit crunch will affect public organisations with deposits in commercial banks and reduce the ability of private sector health providers to borrow to fund developments. Already there is evidence of cutbacks in the private sector. Virgin Healthcare, for example, announced in September that, "Given the current economic conditions and the challenges within the sector we have decided to measure our pace and to evaluate a broader range of entry options."1 In other words it does not see its particular business model working under current economic conditions.

How other private sector suppliers to the NHS will be affected is unclear. But presumably there will be a slow down in, for example, future private finance initiative schemes. The turmoil in the banking system may also affect charitable healthcare providers. Naomi House children’s hospice in Winchester, for example, faces the potential loss of nearly £6m ({euro}8m; $10m) it has invested in the troubled Icelandic bank Kaupthing Singer and Friedlander.2

The problems with the Icelandic banking system may also affect local authorities’ commissioning of social and healthcare services from the voluntary sector as about 100 councils in England, Scotland, and Wales have deposits in collapsed Icelandic banks worth around £843m. Fortunately, most NHS organisations are not allowed to use the commercial banking sector for depositing cash to earn interest. NHS trusts, primary care trusts, and strategic health authorities use the government’s own bank—in the form of the Office of Her Majesty’s Paymaster General.3 However, foundation trusts can invest operating and surplus cash in the commercial sector if they choose (they can also use the Paymaster General).

At least two foundation trusts have reported to their regulator, Monitor, that they have funds at risk in Icelandic banks totalling around £2m, with the Christie Hospital in Manchester having a further £6.5m of charitable funds invested in Kaupthing Singer and Friedlander.4 Monitor states that the potential loss of this money would not contravene the terms of their authorisation or affect services to patients. Of course, if they do lose this money it’s money that will not be spent on patient services. Monitor has issued guidance on such cash deposits, suggesting, for example, using banks with minimal risk ratings and setting maximum deposits in any one account.5 Overall, then, in terms of direct exposure to banking failure from the credit crunch, the NHS should face little danger.

Short to medium term: inflation and claw backs?

Over the next year and up to the end of the current comprehensive spending review settlement in 2011, the NHS’s disposable income may be eroded through inflation rises and possible Treasury claw backs of any surpluses.

Inflation measured by the consumer price index, the measure the Bank of England’s monetary policy committee focuses on, is edging towards 5% (3% above the committee’s target). The retail price index, however, was nudging 6% in the third quarter of this year— the highest since 1991. The monetary policy committee predicts that inflation will peak next year and then start to come down (partly because of recessionary forces gathering pace).6 As figure 1Go indicates, NHS inflation tends to be slightly higher than inflation in the economy as a whole, and every 1% increase costs the NHS around £380m.


Figure 1
View larger version (38K):
[in this window]
[in a new window]
[PowerPoint Slide for Teaching]
  		Fig 1 Percentage annual changes in UK inflation using different measures, 1989-20087 8 9 10

 
Increasing retail prices will also put pressure on NHS staff’s disposable incomes and could encourage higher wage claims, which again (in the absence of productivity improvements) reduces spending on increasing the volume and quality of patient care. Staff covered by the Agenda for Change pay deal (most of the workforce) have an agreed three year pay deal to 2010-11.11 But with inflation currently at around 5% a year and the deal worth around half that, there may be pressures for renegotiation. General practitioners have had no real rise for two years and consultants only low increases, which may also be difficult to maintain if inflation remains at current levels. However, most forecasts predict a fairly sharp reduction in inflation next year—back to around 2%—so the government will strongly resist any claim for pay rises over current deals.

NHS income may, however, be under threat from the Treasury. Currently the NHS in England is projecting a year end underspend of around £1.7bn12 and foundation trusts are reporting cash balances of £2.5bn.13 These sums are piffling relative to the government’s £387bn (around 27% of UK gross domestic product) financial support package. Although the prime minister pledged not to cut spending for health as set out in the 2007 comprehensive spending review,14 taking back unspent money may not be seen as a cut. The Treasury has a track record in clawing back underspends from the NHS: it took back an underpsend on the NHS capital budget of around £2bn in 2006-7 and redistributed the money to the NHS in the 2007 spending review.

The government may try to maintain if not increase public spending as a tactic to ameliorate falling demand in the economy, but there are probably more effective and direct ways of doing this than through health spending. At the margin, the Treasury is likely to tighten as many spending belts as possible to reduce the effect of current government borrowing commitments (fig 2Go). Nevertheless, current spending levels are probably guaranteed. The problems may come in the longer term.


Figure 2
View larger version (30K):
[in this window]
[in a new window]
[PowerPoint Slide for Teaching]
  		Fig 2 Net debt of UK public sector15

 

Long term: zero growth and higher demands?

In the longer term, speculation about not only the credit crisis and its aftermath but the effect this will have on the NHS becomes much more difficult. While, potential claw backs aside, NHS spending is guaranteed up to April 2011, what happens after then looks decidedly less rosy.

Government income from tax receipts will be lower than forecast over the next few years or longer, depending on the depth and length of the recession, and government spending to support its borrowing much higher. What was always going to be a tight spending round in 2010 is now extremely tight. At best the NHS might expect no real growth in funding to 2014—a big change over funding trends to date (fig 3Go) and there will be considerable pressure to cut costs and improve productivity.


Figure 3
View larger version (20K):
[in this window]
[in a new window]
[PowerPoint Slide for Teaching]
  		Fig 3 NHS real annual percentage spending.16 Data for 2008-9 to 2010-11 are estimates based on 2007 spending review in England and draft plans for Scotland, Wales, and Northern Ireland

 
But not only will there be pressures on NHS funding, the combined effect of the credit crunch and recession on the population’s health and wellbeing will increase ill health and demand on healthcare services. The link between deprivation, income, housing, unemployment, and healthcare needs is well documented, and such factors have been part of the weighted capitation formula used to share out the NHS budget across the country for many years.17 And current signs and projections are not encouraging. Unemployment, for example, is rising and could reach two million over the next few months. Apart from the health effects of such a rise (and consequent effect on demand for health care), it will also increase pressure on government benefit spending, further limiting options for other public sector spending such as health.

Even if current governmental efforts to get the financial system up and running again succeed (and short term, the signs are ambiguous to say the least) there will be a price to be paid. So far the UK is committing £387bn of a total worldwide package in excess of £1.6 trillion18: all of it is taxpayers’ and borrowed money. This sum could well increase—right up to the point when the credit worthiness of even governments starts to be called into question. Exactly how, to what extent, and over what period this huge opportunity cost will be born by the NHS is hard to predict, but for now preparation for a difficult financial and health future looks unavoidable.

Cite this as: BMJ 2008;337:a2259.

Competing interests: None declared.

References

  1. Virgin Healthcare. Statement, 19 September 2008. www.virginhealthcare.net/images/virgin_healthcare_statement_19Sep08.pdf.
  2. Hospice has nearly £6m in Iceland. BBC News 2008 Oct 9. http://news.bbc.co.uk/1/hi/england/hampshire/7661428.stm.
  3. HM Paymaster General. About the OPG. www.opg.gov.uk/aboutopg.htm.
  4. Christie Foundation Trust Hospital. Latest statement on Christie bank deposits. Press release, 13 October 2008. www.christie.nhs.uk/press/2008/131008.aspx.
  5. Monitor. Managing operating cash in NHS foundation trusts. 2005. www.monitor-nhsft.gov.uk/publications.php?id=732.
  6. Bank of England. Letter from the governor of the Bank of England on behalf of the MPC to the Chancellor of the Exchequer. www.bankofengland.co.uk/monetarypolicy/pdf/cpiletter080915.pdf.
  7. Office of National Statistics. CPI: annual rate. Cardiff: ONS, 2008.
  8. Office of National Statistics. RPI: percentage change over 12 months—all items exc MIP and depreciation. Cardiff: ONS, 2008.
  9. HM Treasury. GDP deflators. www.hm-treasury.gov.uk/data_gdp_index.htm.
  10. House of Commons Health Select Committee. Public expenditure on health and personal social services: memorandum received from the Department of Health containing replies to a written questionnaire from the committee. www.parliament.uk/parliamentary_committees/health_committee/health_committee_reports_and_publications.cfm.
  11. NHS Employers. 2008-9 pay award. www.nhsemployers.org/pay-conditions/pay-conditions-3612.cfm.
  12. Flory D. The quarter: quarter 1: 2008-9. Department of Health 2008. www.dh.gov.uk (search for gateway No 10436).
  13. Monitor. NHS foundation trusts: review of three months to 30 June 2008. www.monitor-nhsft.gov.uk/documents/NHS_foundation_trusts_review_of_three_months_to_30June2008.pdf.
  14. Chancellor of the Exchequer. Meeting the aspirations of the British people: 2007 Pre budget report and spending review. 2007. www.hm-treasury.gov.uk/d/pbr_csr07_completereport_1546.pdf.
  15. Office of National Statistics. Public sector finances: Net debt as percentage of GDP at market prices (not seasonally adjusted). Cardiff: ONS, 2008.
  16. HM Treasury. Public expenditure statistical analyses, 1989-2007., www.hm-treasury.gov.uk/public_expenditure_statistics_publications.htm.
  17. Department of Health. Resource allocation: weighted capitation formula. 5th ed, 2005. www.dh.gov.uk Search for gateway No 4869).
  18. Finance crisis: In graphics. BBC News 2008 Oct 6. http://news.bbc.co.uk/1/hi/business/7644238.stm.

Add to CiteULike CiteULike   Add to Complore Complore   Add to Connotea Connotea   Add to Del.icio.us Del.icio.us   Add to Digg Digg   Add to Reddit Reddit   Add to StumbleUpon StumbleUpon   Add to Technorati Technorati    What's this?

Relevant Articles

The 2009 budget and the NHS
Chris Ham
BMJ 2009 338: b1760. [Extract] [Full Text]

Alternative reports
Jane Smith
BMJ 2008 337: a2331. [Extract] [Full Text]

Related external webpages:

Helen Barratt's blog on straitened times as a junior doctor
Vidhya Alakeson's blog on the credit crunch and US health insurance
Cam Donaldson's blog on managing the health care credit crunch

This article has been cited by other articles:

  • Ham, C. (2009). The 2009 budget and the NHS. BMJ 338: b1760-b1760 [Full text]  

Rapid Responses:

Read all Rapid Responses

Long Term Effects of Credit Crisis on Healthcare
Khesh S Sidhu
bmj.com, 29 Oct 2008 [Full text]
An uncertain future
Michael B. Mundorff
bmj.com, 7 Nov 2008 [Full text]
Access jobs at BMJ Careers
Whats new online at Student BMJ