NHS faces bigger than expected financial 'black hole'

The National Health Service is facing an even bigger financial "black hole" than politicians and health leaders have acknowledged, following a sharp fall in productivity revealed in an analysis of official data for the Financial Times.

The research, carried out by the Health Foundation, an independent think-tank, shows that despite an inflation-protected budget, hospital productivity tumbled from 2012 as the NHS prepared for, then implemented, a contentious structural shake-up that stripped out layers of management and handed budget control to clinicians.

Government pressure on hospitals to hire more nurses following a 2013 inquiry into a care scandal at a Staffordshire hospital further hit financial performance as many NHS institutions hired agency staff, substantially inflating the health service pay bill, the analysis found.

The findings will fuel the general election debate over the coalition's management of the NHS and suggests whichever party forms the next government may confront an immediate imperative to inject more money into the health service.

All political parties have signed up to a plan to overhaul the NHS over the next five years, published last year by Simon Stevens, chief executive of the English health service.

It concluded an additional £8bn a year above inflation by 2020 would be sufficient to maintain services at current levels - provided productivity increased by between 2 and 3 per cent a year, or the equivalent of £22bn a year by the end of the decade.

The calculations were underpinned by analysis commissioned by health service leaders that suggested productivity had grown by an average of 1.2 per cent a year from the start of the parliament.

However, that analysis did not include data for 2013-14, when hospitals faced severe cost pressures as spending on temporary staff grew by £1bn, or almost 28 per cent, in a single year.

When these figures were included efficiency growth in the hospital sector - which consumes almost half the overall NHS budget - averaged just 0.4 per cent a year, the Health Foundation found. Anita Charlesworth, its chief economist, said this was "substantially below" previous estimates.

It meant that the £8bn a year identified by Mr Stevens must now be viewed as "the absolute minimum" NHS funding requirement. There were "real questions" about the capacity of the health service to deliver the efficiencies envisaged in his blueprint, she added.

Ms Charlesworth forecast that the NHS would need "an immediate injection of cash to stabilise the system" as the new government took office.

The Health Foundation analysed activity and cost data for 2013-14 reported by NHS acute and specialist hospitals in England to arrive at its assessment.

Its findings about the deteriorating performance of the NHS, which employs about 5 per cent of the total workforce, come amid a wider debate about Britain's faltering record on productivity.

In 2014-15, the NHS as a whole is projected to overspend its £110bn annual budget by £626m. This deficit has emerged despite the NHS receiving £250m of additional funding from the Treasury and a further £650m being transferred from planned capital investment to support day-to-day running costs.

Labour said the NHS reorganisation had "damaged patient care and distracted the system from the financial challenge it needed to meet". Repeated cuts to nurse training places had "left the bill for agency staff going through the roof", added Jamie Reed, shadow health minister.

The Conservatives cited a University of York study that they said showed NHS productivity "had increased year on year under this government" - equivalent to 50,000 more doctors since 2010 - while under Labour average productivity "actually fell by 0.3 per cent in the years between 1998 and 2010".

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