NHS Funding and its distribution. Where does the money flow?

This post is intended to be a brief introduction to NHS Funding and its distribution.  It attempts to pull together some of the key elements of that regime in an understandable way, so that non-financial readers can understand how the money flows around the system.  

The NHS.  Since it’s inception in 1942 the NHS has never ceased to be an organisation attracting great media interest.  This is in part because it plays such a personal role in all of our lives, being involved at some level from birth to death; in part because it is, depending on your sources at least the seventh largest employers in the world (after the US Department of Defence, Walmart, Chinese Army, and Indian State Railway to name but a few), with one in every 23 workers in England being an employee; and in part because it has always prided itself on its “free at the point of delivery” ethos, achieved through it being funded from the public purse.

Current Revenue Funding.  In 2012-13 the total revenue investment in local NHS services announced on the 14^th December 2011, will be £91.6 billion, an increase on the previous year of 2.8%.  Though the NHS can count itself lucky that its funding has increased, it will still have to achieve substantial savings this year to balance its books.  This is because the increased funding that the NHS needs to maintain its current quality is increasing at a higher rate.  A victim of its own success, the NHS is having to treat patients who are living longer and falling victim to more complex illnesses, the population is growing, developments in pharmaceuticals and other technology is costly and of course fuel and transport costs are rising.

Distribution of Funding around the country.  This funding is usually distributed throughout the country to regional commissioning organisations called Primary Care Trusts on the basis of a weighted capitation formula.  In layman’s terms the money is handed out to an area on the basis of its population size and the age and health needs of that population.  It is then weighted to account for regional differences in the costs of providing healthcare.  Total expenditure on healthcare in 2010-11 was £87,608 million, see chart below.

Detailed information on the weighted capitation formula can be found within the Department of Health’s leaflet on the subject (7^th Ed. Published in March 2011) An interesting point, though by no means the only one, is that it takes into account the number of people ‘registered’ with a GP in that area, so you could argue that area’s with large numbers not registered will suffer from a shortage of funding.

Buying Healthcare.  Once the local Primary Care Trust has it’s funding, it is then responsible for ‘buying’ healthcare services for it’s population.  At the time of writing there are very few Primary Care Trusts still providing any kind of healthcare themselves.  Their main role is to ascertain, through partnership working with Local Authorities, Social Services and other partners such as local police, what healthcare needs the population of that particular area has, to plan and secure those health services and improve the health of their population.  Primary Care Trusts cover populations ranging from approximately 250,000 to 1,000,000 people generally.

Hospitals.  A large proportion of the Primary Care Trust’s funding is therefore spent on what the NHS people refer to as “secondary care acute hospital providers”, or “Acute Trusts”, and what we refer to as ‘the local hospital’.  These are those organisations that we know well.  Surgeons, consultants, paediatricians, A&E departments, they all live here.  It’s the world of ER, Holby City, Grey’s Anatomy, House….you get the idea.

These organisations are still formally part of the ‘NHS’ in that they are statutary bodies with a responsibility to break even, and are non-profit with any suplus being invested back into the organisation.  However, when the government consolidates the ‘NHS’s various separate Financial Accounts to present the Department of Health Annual Report and Accounts, it currently excludes these organisation’s financial positions,(showing only spend given to Primary Care Trusts and Strategic Health Authorities.) 

Each Hospital ‘Trust’ employs its own staff, much like a subsidiary of a large national company would, whilst still being employees of the larger NHS family. 

The Primary Care Trust pays the Hospital an amount each year calculated by reference to the planned level of activity the Hospital expects for that year and the nationally set price for each piece of activity. (The Payment By Results (PBR) system)

Other Healthcare Providers within the NHS.  Similarly the Primary Care Trusts will be paying other healthcare providing organisations, other ‘secondary care Trusts’, to provide mental health services, learning disability services, health services in prisons, community health services which include more rural district general hospitals, walk in centres, some clinics, health visitors… you get the idea.

Again, these organisations form part of the NHS as a whole.  All of the ‘Trusts’ referred to above, including the Primary Care Trusts themselves are statutory NHS bodies, and as such have a statutory responsibility to break even (i.e. to not make a financial loss!)

In 2010-11 total expenditure by Primary Care Trust's on Hospitals and other Secondary Care Health Care Providers was:  £66,101 million.  The breakdown of areas of that spend is shown in the chart below.

Primary Care.  The Primary Care Trust still needs to buy some other services for its population, and these are known as “primary care contractors”.  Interestingly it appears little known that these are the following:

• Community pharmacies
• Dental practices
• Optometrists and
• General Practitioner (GP) practices.

None of these form part of the NHS account when consolidated.  None of these are statutory NHS bodies.  They are all private contractors with their own accountants, their own payroll, their own profit and loss account.

They receive their money in a similar way to the other Trusts, in the form of a contract payment, but, unlike a Trust who receive a price per activity, repaying some if they don’t undertake the level of activity they planned, or indeed receiving more money if activity levels suddenly rise above planned levels; these organisations have very different contracts.  Many new Dental contracts are based on activity, and will incur a payment back to the Primary Care Trust if expected activity levels paid for are not reached in the year.  For GP Practices though, a large proportion of their contract payment is a price per patient on their list.  Whether that patient attends the GP practice that year for treatment is immaterial. 

GP Practices.  For GPs this payment is governed by the General Medical Services (GMS) contract, or the Personal Medical Services (PMS) contract, depending on which contract the practice signed up to.  The BMA General Practitioners Committee negotiates the contract on the GPs behalf each year.  Click here for the outcome of the negotiations on amendments to the contractual arrangements from April 2012, and here for more information on primary care overall, and primary medical contracting specifically. 

The contracts currently include payments to cover premises costs and IT costs in full.  This differs from a healthcare providing ‘Trust’ as described above, who will have to cover premises and IT costs out of the fixed  ‘price’ it is paid, thus being at risk from increased rent and rates costs.  Under the GMS and PMS regulations, actual rent and rates costs are reimbursed to GP practices, including a notional rent payment made to practices who already own their own building. 

Part of a GP practice payment is performance based dependent on meeting certain quality levels, indeed, some parts are still activity led, with practices receiving a price per injection for childhood immunisation work, for example.  But, should it cost the practice ‘less’ to provide their service than planned, the resulting profit is theirs to keep, similarly any loss is theirs to manage.

Total payments to primary care providers in 2010-11 reached £21,374 million.  See chart below.

The Future.  The NHS is currently in a period of change.  Primary Care Trusts will cease to exist in April 2013. Subject to the passing of the Health and Social Care Bill, for 2013-14 onwards the NHS Commissioning board will allocate resources to new Clinical Commissioning Groups.  A Clinical Commission Group is a group of existing GP practices.  G P practices have been asked to partner up with other local practices for form groups that will take on the responsibility for commissioning healthcare for the population, previously the role of the Primary Care Trust.

Those against this move argue that this is a conflict of interest.  That GP practices have a vested interest in where and how patients are treated, and moving treatment out of acute Trusts and into GP Practice settings would boost their income, making it difficult for them to judge objectively if the move is clinically advantageous to the patient.  They also argue that the economies of scale that a larger Trust benefits from may be lost, if activity is moved out to separate practices.

Those for the change argue that it is precisely this ‘interest’ that best places the GP to judge the best path of care for patients.  The inclusion of other clinical professionals, such as hospital consultants and community nurses, will help to ensure a balanced view of the patients care is taken into account.

The Health and Social Care Bill is currently making its way through parliament.  Whatever happens, the level of funding available to the NHS remains the same.  Whether the changes create improvements to the efficiency of the NHS, releasing funds to invest in improved care, remains to be seen.

Next Monday, 16th Jan, the Lords will consider major aspects of this Bill.