Tariff Tinkering Won’t Save The NHS – But Financial Literacy Just Might

Roy Lilley was right on the money with his take on Wes Streeting’s latest comments about the cost of operations and the dreaded “doom loop.”

Lilley rightly points out that hospitals are not supermarkets and comparing the costs of one Trust with another is like “comparing bananas with cucumbers”. Streeting’s idea of benchmarking Trusts against the “most efficient” and then removing financial top ups may sound appealing from a Treasury perspective but it completely misses the realities of hospital economics.

Estates, PFI contracts, workforce pressures, utility bills and the complex needs of different populations mean that fixed costs dominate. No amount of fiddling with the tariff will erase that.

But if we stop at that conclusion, we miss the bigger issue, which is that most hospitals don’t actually know the true cost of what they do.

Turnover, profit and cashflow – three different things

In the private sector, financial literacy is non-negotiable. Executives live and die by three fundamentals – turnover, profit and cashflow. Yet in NHS hospitals these concepts are too often blurred, confused or simply ignored.

• Turnover = the income that comes in through tariffs, block payments or other streams.
• Profit (or surplus) = what’s left after costs, which requires knowing the true cost of delivery.
• Cashflow = the timing of money in and money out, the lifeblood of day-to-day survival.

Mix these three up and you end up making poor decisions. Services get expanded on the basis of turnover, not profit. Cash shortages get papered over without fixing the mismatch. Cross subsidies get assumed without ever being calculated. Boards need to stop treating finance as an arcane back office function and instead make financial literacy central to leadership and clinical conversations.

Read my blog – False economies: Why cheaper drugs are costing the NHS millions – here.

Discovery before design – mapping the pathway and the costs

The place to start is not with a new formula for the tariff but with a proper understanding of what each pathway costs. That means applying the principle of discovery before design. Mapping every step of a pathway, from referral, through diagnostics, treatment and follow-up and assigning costs at each stage reveals:

• The balance of fixed versus variable costs.
• The effect of complexity and comorbidity on cost per case.
• Where “cheap” procedures cross subsidise expensive ones.
• The hidden costs of delays, bottlenecks or unnecessary steps.

Only then can executives make informed choices about where to invest, what to grow and what to stop.

The three questions every hospital trust board should be asking

With clarity on costs, hospital executives and non-executives can finally ask the questions that really matter:

1. What do we make money on?

These are the services where income exceeds cost, and which generate the surpluses that keep the hospital afloat. Protect them, scale them where appropriate and use them to fund innovation.

2. What do we lose money on but need to maintain and cross subsidise?

Some services will always be loss making but they are essential for the population served. These need to be sustained but only with a clear eyed view that their deficits must be covered by surpluses elsewhere. Pretending otherwise leads to spirals of hidden debt.

3. What’s loss making that we need to stop doing because it could be done better in a neighbourhood setting?

Take Holter ECG monitoring. The national reference cost for providing this test in a hospital is £192. The tariff reimbursement, however, is £143 (plus Market Forces Factor – MFF). That means every time a Trust delivers the test, it racks up a loss.

Yet the same service could be delivered safely and effectively in primary care for £143, or even slightly less, without the overheads of hospital estates and infrastructure.

It’s a classic case of activity that is clinically suitable for community delivery, financially unsustainable in hospital and a candidate for shifting out into neighbourhood care.

Hanging on to services like this in hospitals drains resources, demoralises staff and worsens the financial position. Being willing to move them out is not about abandoning patients. It’s about delivering the right care, in the right place, at the right cost.

Declaration of interest. I work with Edina Healthcare, which provides community based Holter ECG services. That experience gives me a close-up view of how these diagnostics can be delivered at tariff price or below, while also freeing up hospital capacity. Why this matters now Streeting’s £20bn savings target looms large. If the approach is simply to squeeze costs down to match the “most efficient” Trusts, we will see declining quality, perverse incentives and more financial crises. But there is another way. If hospitals invest the time to understand their true costs and if boards have the courage to ask the three fundamental questions, they can take control of their own financial destiny. That means:

• Building financial literacy into executive and clinical leadership training.
• Commissioning proper pathway cost mapping exercises.
• Being honest about cross subsidies.
• Working with neighbourhood teams and ICBs to shift appropriate services out of the acute sector.

Crunching numbers versus fixing fundamentals

Roy is right when he says: “You can crunch the numbers until the batteries in yer calculator conk-out, but you won’t fix anything until you fix the economy, stupid.” I’d add this: you also won’t fix anything until you understand your own numbers. Turnover, profit and cashflow are not the same thing. Cross subsidies must be measured, not assumed. Pathways can’t be redesigned in the dark. The doom loop won’t be broken by tariff tinkering, efficiency drives or financial top-ups. It will only be broken when hospital boards understand where they truly make money, where they knowingly lose it and where they must stop losing it altogether. That’s the conversation we need to start having – urgently.

At www.scottmckenzieconsultancy.com, we work directly inside the NHS, supporting provider organisations, commissioners and system leaders to implement real change. We then help pharma, medtech and device companies interpret what’s happening, so they can engage the right stakeholders, align with NHS priorities and get their innovations embedded into care pathways.

With more than 20 years working within the NHS and Pharma, medtech and devices companies, Scott brings a unique dual perspective, now captured in his book, Embedded: How Pharma, MedTech, and Device Companies Can Get Their Products into NHS Pathways and Stay There, which distils everything he’s learned into a practical playbook. Whether you’re launching a new product or trying to unlock stalled adoption, Embedded shows you how to reframe your offer, align with NHS priorities and make change stick.