Special report: The effect of the Budget on healthcare markets

Experts call for new approaches to funding assets as Government takes £500m from NHS funds

The introduction of IT systems, cost-cutting carbon reduction programmes, and improvements to procurement activities have helped put the NHS in England on track to save more than £1billion this year.

However, it was revealed in last week’s Budget announcement that trusts across the country will see just a small percentage of this cash as the Government reneges on its pledge to inject any savings generated back into frontline services.

The argument for front-loading efficiency plans was to generate money to re-invest in transforming services so they would be sustainable as the impact of constrained funding started to bite. Instead, it seems that at least some of the savings will instead be channelled towards central Government deficit reduction

The Government had planned to spend £105.9billion on the NHS in 2011/12. But, after last week’s announcement, this figure is now £99m less. And, while £400m has been added to the spending plan for 2012/13, it still leaves the health service half a billion pounds down on the original promise.

At the same time, the NHS is forecasting a significant surplus during 2011/12, approaching £1.2billion by the end of the second quarter of this year. And, despite promising this would be given back to trusts which had made efforts to cut their costs, it now appears it will go into the central government purse.

This could have a significant impact on the ability of trusts to continue to innovate and drive further efficiencies, according to experts.

Anita Charlesworth, chief economist at the Nuffield Trust health think tank, said it ran roughshod over the Government’s QIPP programme, which was introduced to drive quality, innovation, productivity and performance in the public sector. She said: “This must raise questions about the effectiveness of the QIPP. The argument for front-loading efficiency plans was to generate money to re-invest in transforming services so that they would be sustainable in later years as the impact of constrained funding started to bite. Instead, it seems that at least some of the savings are not going to be re-invested in new models of service delivery, but will instead be channelled towards central Government deficit reduction.

“Asking the NHS to take an equal share of the pain across the public services amounts to a productivity challenge of around 6%. Whatever happens, the NHS needs to plan for two more years of belt tightening and it needs to be prepared for them to be tougher than they are now.”

Labour’s shadow health minister, Andy Burnham, accused the Chancellor, George Osborne, of cutting funding in order to meet the shortfall caused by tax cuts for the country’s highest earners.

Whatever happens, the NHS needs to plan for two more years of belt tightening and it needs to be prepared for them to be tougher than they are now

“This week we saw their true colours,” he said. “They are handing out tax cuts to millionaires and P45s to nurses.”

The Department of Health has said much of the cash saved over the past year has been through the introduction of healthcare IT systems, which drive efficiencies in administrative functions and speed up patient pathways. Capital budgets were also curtailed significantly, helping to make further savings.

And they defended the decision to hold back £500m of the promised funding for this year. A spokesman said: “The NHS budget in real terms means we are investing an extra £12.5billion in the NHS over the course of this Parliament.

"We have already transferred the maximum amount of capital budget permitted into next year and used some to fund part of £330m for vital projects across the NHS to benefit patients. The £500m represents less than 0.5% of the total Department of Health budget."

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But just how will this affect the procurement of new equipment and supplies and the healthcare estate?

In his announcement, the Chancellor unveiled a faster-than-expected drop in corporation tax - to 24% from April this year. But, while this will go some way to helping businesses stay afloat, market insiders have criticised him for not going far enough.

Simon Walker, director general of the Institute of Directors, said: "While any tax reduction is welcome, the Chancellor has not done enough to free business from the burdens and barriers that are holding economic growth back.

“George Osborne must go much further if he wants to fire up the engines of the economy. There was a bold move on Corporation Tax, but in the bigger picture this is still not far enough or fast enough.”

And John Cridland, director of the Confederation of British Industry said that while the cut in corporation tax would make the UK more ‘internationally competitive’, he added that what businesses were really looking for was change in the regulatory environment, which is often seen as a barrier to trading. This includes the controversial introduction of the Carbon Reduction Commitment, which will see NHS trusts have to buy allowances to cover the cost of their energy emissions. They would also face fines unless they could prove they were driving down their CO2 use.

While any tax reduction is welcome, the Chancellor has not done enough to free business from the burdens and barriers that are holding economic growth back

Cridland said: “For smaller businesses, things may not feel very different on the ground. It would have also been a huge relief if the Chancellor had taken the opportunity to get rid of the currently unworkable Carbon Reduction Commitment."

But small businesses are set to benefit from the decision to simplify the tax system, which will see some firms no longer having to present full accounts to HMRC.

The move covers businesses with a turnover of £77,000 or less and means they will potentially pay tax on cash profits rather than full accounts from April next year, providing there are no major objections when the issue goes out to consultation later this year.

Announcing the plan, Osborne said: “The Office of Tax Simplification proposed that we tax small firms on the basis of the cash that passes through their businesses, rather than asking them to spend a huge amount of time doing calculations designed for big business. This will make filling in tax returns dramatically simpler for more than three million businesses.”

Currently, HMRC calculates the tax owed by small businesses based on self-assessment tax returns. Under the new system only evidence of receipts and payments would be required.

Commenting on the potential impact of this on businesses, head of tax for The Association of Chartered Certified Accountants, Chas Roy-Chowdhury, said: "The aim is to ensure that SMEs use rules designed for them, rather than rules designed for larger business. Allowing for cash accounting is a good idea if it helps SMEs, but HMRC needs to make sure that it doesn't affect the credibility of the tax system and isn't a Trojan horse for ever-rising thresholds."

It would have also been a huge relief if the Chancellor had taken the opportunity to get rid of the currently unworkable Carbon Reduction Commitment

Udhi Silva, founder of Medical Supermarket, an Amazon-style web service for the procurement of medical equipment, said a major transformation was needed in the way the NHS does business. He added: “There is a lot of red tape and bureaucracy and a lot of legislation around suppliers and purchasing processes. This means it often takes months and months to complete a contract, which means the NHS doesn’t get the savings it could and during this period the market often changes.”

This was a view supported by David Martin, general manager of Siemens Financial Services. He said that, with cuts to capital spending, the key for the NHS moving forward was to change the way it procures medical technology.

He added: “Assets within the NHS are getting older and older and the health service will never have enough cash to replace them all. It has got to be thinking of alternative methods of financing. What trusts shouldn’t be doing is paying upfront for assets. They should be spreading the payments.

“Take private sector companies. They rarely pay cash for technology as this is a purchase that will only depreciate in value. The NHS just seems to look at capital when in reality it should not be using its capital funds to purchase equipment.

The NHS has got to be thinking of alternative methods of financing. What it shouldn’t be doing is paying upfront for assets.

“I would have liked to see trusts being advised that they don’t need to use capital in this way. If that were the case, trusts would be able to use what funds they did have on many more important things like nurses and investing in drugs. It should not be spent on technology which depreciates in value.”

Turning to the healthcare estate, it is likely that changes will need to be made and that innovative new procurement routes will have to be considered as there will be little, if no, capital funding and PFI has proved to be more costly than originally envisaged.

The reduction in capital coupled with the cost of estate stock through routes such as PFI and PPP means it will be important for new funding models to be developed and some innovative thinking to take place

Speaking to BBH this week , Paul Kingsmoor, president of the Institute of Healthcare Engineering and Estate Management, said the ability to ‘think differently’ would be essential for EFM professionals in the coming months.

He added: “The current economic climate has brought challenges for all NHS organisations and as such the health estate will have to make a contribution to efficiencies and deliver in new ways. As a professional group we are well used to delivering and seeking opportunities for savings, and or further income generation. The challenge for us has always been the same; the biggest difference today is the scale of this.”

With the level of capital spend nowhere near the peak seen over the past decade, he said estates and facilities managers would need to use what they have much more efficiently.

Being more commercial in our approach to the delivery of estates services will help us get the best deal and deliver services more effectively, regardless if this is provided by the private or public sector

“The reduction in capital coupled with the cost of estate stock through routes such as PFI and PPP means it will be important for new funding models to be developed and some innovative thinking to take place. What is clear is that we will have to adapt more of our existing estate and use this more efficiently as the type of capital spend seen over the past 15 years is not going to continue. Greater standardisation of buildings, flexibility, new manufacturing methods and greater collaboration on procurement of capital will all help to drive down cost.”

Among the biggest challenges will be backlog maintenance, and he urged managers to be ‘resourceful and innovative’, adding: “Outsourcing has had an important role over the years, but we might see more insourcing in the future as the private sector does not have a monopoly on good ideas. Being more commercial in our approach to the delivery of estates services will help us get the best deal and deliver services more effectively, regardless if this is provided by the private or public sector.”

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