Health and Social Care: bridging the financial challenge

On 4 October 2018, the Scottish Government published its long-awaited Medium Term Health and Social Care Financial Framework.  This came on the back of the Scottish Government’s more general Five Year Financial Strategy, published in May 2018, which covered public finances as a whole, but included specific reference to health.  So what do these two documents tell us about the outlook for health funding?

The Scottish Government’s commitments

The Scottish Government has made a number of commitments in respect of health funding.  The commitments include both promises for extra health spending as well as commitments to alter the distribution of that spending, providing for increased spending on primary health care, community health care and social care rather than hospital care.  The headline commitment is to increase resource spending on the NHS by £2 billion over the course of this Parliament (2016-17 to 2021-22).

Plans for increased spending

In May 2018, the Scottish Government outlined planned increases in health spending that would ensure that it meets the headline commitment to increase resource spending by £2 billion (by 2021-22).  This would see the health resource budget increasing to £14.1 billion in 2021-22, equivalent to an average annual cash increase of 3.1%, or 1.4% in real terms.

It is hard to directly compare these figures with those set out in the more recent October publication.  This later publication focuses on different definitions of health spending, covers different time periods and does not provide tables to support the analysis.  Under the proposals set out in the October publication, “frontline” health expenditure is set to increase by £1.5 billion over the period 2016-17 to 2021-22.  Frontline health expenditure includes spending by the 14 geographical Health Boards, NHS24, the Golden Jubilee Hospital, the State Hospital and the Scottish Ambulance Service.  The remaining £0.5 billion of the £2 billion commitment is likely to be accounted for by a separate commitment to increase spending on primary care (primarily GPs) by £500 million.

Longer-term plans through to 2023-24 are also provided, but against yet another definition: total health and social care running costs.  This includes frontline health expenditure plus social care expenditure.  The Scottish Government predicts that increasing pressures on the health and social care budget will, in the absence of any action being taken, result in spending rising by around 5% per year in cash terms, or just over 3% in real terms, over the period 2016-17 to 2023-24.

These pressures will result from price increases, demographic change and non-demographic change (demand-led growth resulting from increased public expectations, technological advances and service developments such as new drugs).

SPICe_Blog_2018_HealthSpending-01To address these challenges, the Scottish Government proposes that action is taken to find savings so that services can be delivered with a smaller increase in the budget.  According to the Scottish Government’s analysis, a total of almost £2 billion in savings are expected to be delivered over this period.  These savings are expected to come through a combination of efficiency savings (more than £1 billion), shifting the balance of care away from hospitals, better regional working and public health measures.  Whether such levels of savings can be achieved remains to be seen, coming on the back of successive years of efficiency savings.  Furthermore, even with these substantial savings, the Scottish Government still expects there to be a funding gap of £159 million in 2023-24 which will remain to be filled.

Under the Scottish Government’s projections, taking into account the proposed savings, health and social care expenditure will increase from £14.7 billion in 2016-17 to £18.8 billion in 2023-24.  This represents an average annual cash increase of 3.6% (or around 1.8% per year in real terms)

Where will the money come from?

The Scottish Government’s proposals for spending in 2023-24 involve additional spending of £4.1 billion when compared with 2016-17.  Over the same period, the Scottish Government will have received, or expects to receive, a similar sum (£4 billion) in Barnett consequentials as a result of additional spending on the NHS in England.  So, the Scottish Government could achieve its spending plans simply by sticking to its commitment to pass on health-related Barnett consequentials to the Scottish health budget.

However, a caveat to this is that the UK Government has indicated that it might opt to fund some of the increased health expenditure through tax increases.  If the UK Government chooses to increase income tax to pay for more health spending, and the Scottish Government does not introduce equivalent changes to Scottish income tax, this could have a negative impact on the Scottish Government’s budget through the operation of the fiscal framework.  [This will be explained more fully in a forthcoming SPICe Spotlight blog post.]

Will this be enough to meet increasing demand?

The bigger question, which is much harder to answer, is whether this will be enough to meet the increasing demands for health and social care without impacting on the availability and/or quality of service.

The Scottish Government analysis suggests that pressures can be managed with a 1.8% real terms increase in spending, assuming that the savings identified are realised.  However, this seems to be at odds with other research that has been conducted which suggests that much higher spending increases will be required.  For example, the Institute for Fiscal Studies and Health Foundation estimate that UK spending on healthcare will have to rise by an average of 3.3% a year in real terms over the next 15 years just to maintain NHS provision at current levels, and that social care funding will need to increase by 3.9% a year in real terms in order to maintain current provision.  As with the Scottish Government calculations, these projections assume that productivity improvements will deliver savings over the period and act to offset the spending increase that would otherwise be required.

A further question is how the Scottish Government can ensure that social care funding increases at the rate envisaged in its plans, given that it only has direct control over the amount spent on health, with social care spending being determined by local authorities.

Nicola Hudson, Senior Researcher, Financial Scrutiny Unit