- Samuel Rigby, research fellow1,
- Hadjer Nacer, research fellow1,
- Samantha Field, research fellow1,
- Irene Papanicolas, professor 2 3,
- Martin McKee, professor 1 4,
- Jonathan Cylus, , senior health economist1 2 3 4 5 6
1London School of Hygiene and Tropical Medicine Faculty of Public Health, London, UK
2London School of Economics and Political Science, London, UK
3Brown University, Providence, USA
4European Observatory on Health Systems and Policies, London, UK
5World Health Organization Regional Office for Europe, Barcelona, Spain
6Barcelona Institute for Global Health, Barcelona, Spain
- Correspondence to: J Cylus j.d.cylus{at}lse.ac.uk
Inflation in the UK has soared to a rate not seen in four decades. Growth in the consumer price index (CPI), which captures price changes across a standard basket of household goods and services, reached a peak of 11.1% between October 2021 and October 2022 and remains above historical averages.1 As a major employer and purchaser of goods and services, the NHS is inevitably exposed to macroeconomic conditions, including price changes. Internal estimates suggest inflation alone may cost the NHS £6bn-£7bn in 2023-24,2 equivalent to around 4% of the £160bn NHS England budget.3 At the same time the NHS is facing record demand. In February 2023, 7.2 million people were on waiting lists for NHS consultant appointments, twice the number waiting for care in 2015.4
Health chiefs have reacted to the combined effects of increasing health needs and rising prices by arguing that NHS spending levels are inadequate.5 Some commentators have also argued that the NHS cannot afford to pay higher prices and still provide access to quality services on its current budget.67 But the government insists that the additional £3.3bn it has committed in 2023-24 and 2024-25 will enable the NHS in England to address inflationary pressures and still deliver both improved primary care and emergency services.8 Who is right?
How inflation affects the NHS
The NHS depends on “inputs” ranging from energy needed to power lighting and machinery, to skilled labour needed to coordinate and deliver complex surgery. To obtain these inputs, it either accepts market prices or, where possible, uses its purchasing power or other mechanisms to lower the costs.
Crucially, the headline inflation figure conceals important variations in the prices of these inputs. In March 2022, prices for electricity and gas were 28.7% and 71.5% higher than the previous year.910 The costs of producing other inputs that require intensive energy use, such as building materials, chemicals, and pharmaceuticals, have risen along with energy prices.
Inflation has also increased cost burdens on households, which, in turn, creates demand for higher wages in all sectors, including health.1 Annual pay growth in the private sector overall rose to 7.2% in November 2022, the highest on record outside the pandemic, putting pressure on the NHS to follow suit.11 Given that staff wages account for 65% of the NHS operational budget, even small increases in pay will greatly affect expenditure.12
In addition to putting pressure on the aforementioned prices, inflation has other indirect effects. Many private finance initiative schemes used to build new hospitals or to pay for other infrastructure are structured so that trusts bear the risk of the increased interest rates used to curb inflation.13 Inflation may also adversely affect population health as people struggle with the costs of food and energy, thereby increasing demand for health services.14
Most health prices have been kept artificially low
Although NHS providers have been unable to avoid energy price increases, they have been able to limit exposure to price growth in other areas, including for both labour and commodities. With its dominant role in the market for health workers, the NHS has been able to suppress pay growth below the CPI inflation rate for over a decade.15 In England, ministers set the parameters for the notionally independent NHS pay review boards and, if they wish, can override the boards’ decisions to keep NHS salary increases low.16 These arrangements shield the NHS from case-by-case pay negotiations in the open market, which could drive up salary costs in response to inflation, as is the case in the private sector.12
Additionally, the NHS, given its size in the market for healthcare products, can exert substantial downward pressure on the prices it pays for healthcare commodities. This has been most apparent with medicines, where it has engaged in confidential agreements that are thought to have saved billions, though there have been some concerns that expensive new medicines obtain market access without showing that they provide commensurate value in terms of health gain.17 Indeed, since 2019, many suppliers have voluntarily committed to a scheme capping growth in NHS spending on branded medicines to 2% to obtain market access to the NHS.18 Similar voluntary agreements have been in place for decades.19 These mechanisms, alongside shifts to generic medicines (the prices of which are also negotiated), enabled a fall in the net cost per item across most British National Formulary drug groups between 2006 and 2016.20
Increasingly, the NHS has attempted to use its purchasing power to reduce the cost of other commodites such as medical swabs or even toilet paper by using the NHS supply chain to increase bulk purchasing,21 although it typically has less purchasing power with other commodities, particularly where it has a smaller market share. However, for some services, such as health IT and electronic patient record systems, the NHS’s large market share may allow for some price control.
Overall, because of the way most prices are determined in the NHS, economy-wide price inflation does not automatically translate into higher prices for most healthcare inputs. The NHS is therefore, in principle, well insulated from short term price fluctuations.
Long term price divergence is not sustainable
There has been substantial divergence between growth in prices paid by the NHS and growth in broader consumer prices for at least a decade. As an example, figure 1 compares changes in consumer prices with mean basic pay for all NHS staff per full time equivalent, as well as with earnings across the public and private sectors indexed as if all four were equivalent in 2011. NHS basic pay has grown more slowly than consumer prices, as well as more slowly than earnings growth in the public and private sectors overall.
Economic theory posits that suppliers will provide goods or services so long as the price they receive is in excess of their marginal cost of production. Put simply, if costs faced by suppliers increase more quickly than the prices paid by the NHS, we would expect a reduced supply of said inputs.
Indeed, staff are leaving the NHS in record numbers. Over 40 000 nurses left the NHS in the year to June 2022,24 and numbers are likely to continue to rise given the overload of those remaining, poor working conditions, and burnout.25 In 2022, fewer than half (42.1%) of NHS staff thought their work was valued by their employer and only 25.6% were satisfied with their level of pay.26 The extent of dissatisfaction was evidenced by large scale strike action and the ongoing failure to fill vacancies, with over 10% of nursing roles unfilled.27 As well as creating care gaps, declining staff numbers drive up costs, with many hospitals paying high locum fees to cover shifts.28
The situation with medicines is more complicated. Some pharmaceutical companies have withdrawn from voluntary NHS pricing agreements in 2023 to protest against the high repayments they have had to make to government for exceeding the 2% agreed expenditure growth. Under the default statutory scheme, which they must then participate in if they want to sell branded medicines to the NHS, the limits on branded medicine expenditure growth are even stricter than under the voluntary scheme, meaning that price growth for these medicines will implicitly be even slower.29 Withdrawing from these agreements would appear counterproductive for pharmaceutical manufacturers; however, it reflects their increasing frustration with strong price control mechanisms. Though it is unlikely that manufacturer’s frustration will have significant implications for medicines supply in the near term, they seem unlikely to accept much more downwards pressure on prices.30
For these reasons, we believe that because of inflation the NHS will need to soften its approach to price control in general to provide care to meet patient needs. Particularly for labour, prices will need to rise more rapidly than they have in recent years to catch up with prices in the rest of the economy.
Efficiency gains are only marginal
If the prices paid by the NHS are to more closely match those in the rest of the economy, where will the resources come from? The government already commits 9.9% of gross domestic profit (GDP) to healthcare, second only to Germany in Europe,31 and additional funding—beyond the £3.3bn committed in 2023/24 and 2024/25—would require difficult trade-offs. Money can come only from spending cuts in other sectors, tax rises, or borrowing at high interest rates, none of which is particularly attractive to the government.
All health systems have inefficiencies, and one solution would be for the NHS to redirect poorly used resources to cover higher prices. NHS productivity increased by 16.7% between 2004-5 and 2016-17, but some estimates suggest productivity has declined more recently, which may mean there is scope for using productivity gains to pay for price increases.3233
Increases in productivity require either producing more or better output with the same input (eg, providing more patient consultations without increasing the workforce or budget), or using fewer inputs to produce more or the same level of outputs (eg, reducing the unit cost of each consultation by reducing prices or purging unnecessary inputs).34 It is only the second of these that offers scope to generate any savings.35 Though it may be possible to reduce expenditures for some non-labour inputs, such as for low value medicines, and reallocate this expenditure to cover price or volume increases for other inputs, like labour, it is unlikely to save enough to cover the additional costs of needed price increases.
However, the NHS needs to increase both the price and, particularly in the case of labour, the volume of its inputs to reduce backlogs and meet societal expectations. An increase in both the price and volume of inputs necessitates a higher level of expenditure, as expenditure equals the price×volume of inputs, regardless of whether productivity increases.
Importantly, in many respects, the NHS is already highly efficient, with administrative costs among the lowest in the Organisation for Economic Cooperation and Development.31 Indeed, accounts from hospitals suggest that a lack of staff is now undermining efficiency and limiting the volume of care that can be delivered, exemplified by the fact that only 17% of midwives are able to meet all of the conflicting demands on their time.25 These problems are exacerbated by the unreliability of obsolete or poorly maintained equipment and the high costs of locum or agency staff.28 Put simply, if staff and equipment are already working at almost full capacity, it is impossible to reduce their numbers and ultimately further reduce expenditures while ensuring complex packages of care can be assembled at the right time in the right place.36
NHS requires more funding to raise prices
The prices paid by the NHS will need to align more closely with price increases in the rest of the economy if it is to retain health workers and obtain goods. Although the NHS has strong mechanisms to control prices and limit the effect of inflation, overusing these mechanisms is likely to hinder its ability to preserve care volumes and quality. Ministers need to decide whether they will inject funding on the scale that the NHS needs or allow inflation to further erode the health service.
The current inflationary crisis makes this decision urgent. NHS performance is already driving people to the private sector, risking the creation of a two tier system which paradoxically could further undermine the NHS’s price control power by creating a new market for healthcare. The proportion of UK spending on out-of-pocket and voluntary insurance is now around four times higher than it was four decades ago, the fastest rise in the G7,37 with private spending on healthcare amounting to £1 out of every £50 of GDP—high for a system that claims to provide universal free health coverage.38
In the short term, realistic pay deals are essential to stem the exodus of staff, as is a major programme of building and equipment maintenance, despite higher building costs. There is widespread agreement, but little action, on the need for rapid investment in social care to support the release of the roughly 13 000 NHS beds occupied by those medically ready to be discharged.39
While extreme inflationary pressures may ease soon, price growth is likely to remain higher than in recent decades.40 A one-off cash injection may help ease the current crisis, but it will not be enough to sustain the compound effects of high year-on-year price inflation. Continued suppression of wage growth will exacerbate the workforce crisis while failure to invest in capital will contribute to inefficiency and restrict access to new medical technologies. There are also areas in which there is no scope to control cost increases, such as energy, and these costs will need to be covered by the budget.
For the NHS to weather the current crisis, it must pay realistic prices for the goods and services it needs. Based on figure 1, for example, we estimate that NHS pay rates would need to increase by around 15% in 2023 to bring health worker salaries in line with the purchasing power NHS staff enjoyed in 2011. If the NHS is to avoid further reduction in the volume and quality of care it has only one viable option: a profound and sustained investment and transformation to build up a system that is fit for purpose and that can restore the trust that has been lost in the past decade.36 This will require not only higher spending levels today but also higher year-on-year growth in spending that more closely reflects what is happening in the wider economy.
Key messages
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The NHS has a range of mechanisms that enable it to keep the prices it pays, particularly for labour and commodities, below market rates
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High inflation is rendering these mechanisms unviable in the short term and raises questions over their viability long term
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To survive the inflationary crisis, the NHS needs to raise the prices it pays so they are more closely aligned with those in the rest of the economy
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This will require greater funding and higher annual growth rates for NHS budgets
Footnotes
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Contributors and sources: SR, HN, and SF are public health registrars with experience delivering frontline healthcare in the NHS and supporting the design and evaluation of local level health and care services. IP specialises in comparative health system performance. MM has written extensively on health policy. JC advises European countries on issues related to health financing. JC and IP conceived of the initial idea. SR, HN, and SF developed the first draft. All authors contributed to subsequent drafts. JC is the guarantor.
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Competing interests: We have read and understood BMJ policy on declaration of interests and declare that MM is president of the BMA but writes in a personal capacity.
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Provenance and peer review: Not commissioned; externally peer reviewed.
