The National Health Service could be facing a much larger gap in funds than is currently recognised by MPs and health officials, suggest findings of a new report by think-tank the Health Foundation.

It concludes that despite a ring-fenced NHS budget hospital productivity has actually fallen since 2012 and efficiency savings have been minimal, as operating costs continue to overshoot income.

The NHS is currently on track for a budget overspend of £626 million for 2014/15, despite having bagged an extra £250 million of additional funds from the treasury and a further £650 million from planned capital investment to support running costs.

NHS England is calling for an extra £8 billion a year from the government to help meet growing demand and underpin an overhaul of services that will help generate the annual productivity improvements of 2%-3% needed to balance the books.

However, the Health Foundation says its analysis suggests attaining this level of improvement will be “a very substantial challenge”. Delivering productivity growth of 2%-3% a year to 2020/21 would represent “an unprecedented level of health service productivity improvement for such a long period,” it warns.

One reason for this is that while NHS hospitals have become more efficient over this parliament, the rate of improvement averaged just 0.4% a year, and this is substantially below official estimates of around 1.2% a year - because these didn’t take into account unexpected additional cost pressures in 2013/14.

Surging staff costs

The key driver of these surging costs was a rise in the number of staff employed by the service in the wake of the Mid Staffs scandal and subsequent Francis report. The number of permanent staff employed grew 2.3% in 2013/14, but it is the 15.8% rise in temporary staff that really ate into the cash, with costs growing by £1 billion (27.4%) in that year. 

The report concludes that there is scope for further productivity gain, but “unlocking that potential will almost certainly require a very different approach and focus from politicians and policy makers over the next five years”. 

“There needs to be much less focus on individual organisations’ performance, and much more on looking at the health system holistically,” it said.