Hospital loans from government 'unmanageable'

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The financial struggles of the NHS in England are a major talking point. The government has promised a new long-term funding plan. But could it be making life harder for hospitals by charging interest on nearly £5bn of loans made over the last few years? Some trusts are even being hit with interest rates of 6%.

That's one of the claims in a new report by former health secretary Alan Milburn and colleagues at the consultancy firm PwC, in partnership with the Healthcare Financial Management Association.

It comes hard on the heels of revelations that the NHS trusts ran up a total deficit of nearly £1bn in the 2017-18 year.

Hospitals in England which are struggling to cover their costs can agree extra funding from the NHS nationally as long as they stick to an agreed deficit reduction plan. But if they fall deeper into the red they may need extra cash, in which case they negotiate bailout loans from the Department of Health and Social Care.

These loans are now, according to the report, creating an "unmanageable burden" for the trusts which have run up the debt in recent years.

It says that almost half of NHS providers in England have borrowed in this way to fund deficits and there is "little to no prospect of the debt ever being repaid".

Higher rates of interest

At the end of the 2016-17 year, the total debt amounted to £4.9bn with annual interest payments of £169m. The trusts with the biggest problems which have been put into the financial special measures regime are charged higher rates of interest, rising to 6%.

As the report says "trusts experiencing significant financial challenges are further financially penalised".

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A Department of Health and Social Care spokesperson said: "We provide interim loans to help ensure the continuity and stability of services for patients and to help hospitals and health trusts get their finances in order. Taxpayers expect us to spend additional funding wisely; that is why we apply interest rates which encourage trusts to improve their financial management."

The report authors make the point that in the private sector a struggling corporate borrower would be charged higher rates of interest to reflect the credit risk and could be liquidated by the banks. That is not possible in the NHS where charging higher interest rates is hardly likely to encourage prompt loan repayments.

They argue that all this debt could be converted into government shares in the trusts with the removal of "onerous" interest rates.

'Loan shark'

It's worth pointing out that the interest on these loans goes to the Department of Health and Social Care and not the Treasury, so in theory the money stays in the health system although it's not clear where.

But critics argue that the money should be used transparently for front-line patient care rather than circulated around the system in loans and interest payments. One source described the department as acting like a "loan shark".

David Williams of NHS Providers said: "The system does nothing to improve the quality of care for patients, instead reinforcing a hand-to-mouth existence in the places that most need stability and long-term planning."

Mr Milburn argues that while it is welcome that the government is considering more long-term investment, there is a risk that the resources will be wasted if there are not major reforms to the way money moves around the NHS in England. A rethink of hospital debt and interest is high on his wish list.

More tax?

Ministers are still haggling over the details of the health funding plan which is expected in time for the 70th birthday of the NHS in early July. Health leaders are pressing hard for a long-term settlement which can cope with the increasing demographic challenges and bring down waiting lists.

To achieve this, the Institute for Fiscal Studies and the Health Foundation say annual real terms funding rises of 4% are needed with higher taxation likely to be needed to cover some of the increases. The Academy of Medical Royal Colleges has thrown its weight behind this.

Health and Social Care Secretary Jeremy Hunt is pushing for something near 4%.

But Chancellor Philip Hammond, ahead of tough negotiations with the rest of Whitehall, is holding out for an annual health deal closer to 2%.

The headlines of the government plan will focus on the amount of new money available. But there will be scrutiny too of what ministers do to ensure the cash is used most efficiently around the NHS.