9.3 Explaining the rise in costs at the NNUH in the period since PFI -that is, since 2000/01

Table 9.4 below shows the increase in costs between 2000/01 and 2007/08 under three headings; 'staff costs', 'clinical supplies' and 'premises and others'. after deleting the rent from the Premises account and then combining the remainder of the Premises account with 'Others'.

We can see that the rise in costs to explain is £119.6 mn - the same (allowing for rounding) as the £119.5 mn derived at the end of the previous section.

We can see that the rise in 'Clinical supplies' costs (over 100% of the 2000/01 figure) has been proportionately the sharpest of the three categories. However the rise in staff costs has also been very sharp (by 61% of the 2000/01 figure).

How can these increases be explained? They might be explained by the following;

• the expenses associated with the hospital being a medical school

• an increase in prices over and above the general rise in prices, but which, although hospital-specific, are not associated with the PFI contract;29

• an increase in the number of patients being treated.

Look at the first of these. The expenses associated with the hospital being a medical school, that is education, training and research expenses totalled £4.9 mn in 2000/01 and £18.1 mn in 2007/0830. The 2000/01 figure is equivalent to £5.9 mn in 2007 prices so that the real increase between 2000/01 and 2007/08 is £12.2 mn. This is about (12.2*100)/119.6 equals 10 per cent of the balance that we are trying to explain. We are left with £107.4 mn to explain.

Now look at the second item, that is the increase in costs due to prices rising in the hospital sector faster than the general price increase in the economy. We have already allowed for the general rise in prices but staff pay in the health sector has risen faster than the retail price index.

Pay has risen rapidly in the NHS (including the hospital sector) since 1999/2000. The pay increases arose from three new contracts introduced since 2003. These were rises under the Agenda for Change (covering all nurses and non-clinical staff) and new contracts for hospital consultants/doctors and for general practioners - see Palmer 2006, 16; Reform 2005, 7-9; and Wanless et al 2007, 93-99.

As a result of these pay rises, NHS specific-inflation has been faster than the general rate of inflation. Thus over the decade between 1997/98 and 2007/08, NHS-specific prices rose by 48 per cent (Wanless et al 2007, 92) compared to a rise in the general rate of inflation (as measured by the retail price index) over the same period of 31 per cent.

There has also been a rapid rise in prices in the hospital sector within the NHS as shown in Table 9.5 below.

We can see from table 9.5 that staff pay in the hospital sector rose by 48 per cent between 2000/01 and 2007/08 compared to a rise in general prices (as measured by the Retail Price Index) over the same period of 21 per cent. Thus about 22 per cent (148/121 = 122) of the increase in staff costs can be explained by rises over and above the general rate of inflation.

'Clinical supplies' are assumed to be intermediate goods. The prices for these seem to have risen more slowly than the retail price index but here they are assumed to have risen at the same rate so no adjustment is necessary.

Costs under the heading of 'others' are assumed to consist of an equal mix of labour and intermediate goods so that prices of those are assumed to have risen at an average of 28 per cent over the 2000/01 to 2007/08 period or about 1.28/1.21 = 6 per cent faster than prices in general.

Table 9.6 summarises the increases in costs for the three categories of costs.

As we can see, the increase in staff costs left to be explained is £37.6 mn. The increases of the other two categories to be explained are £28.5 mn and £13.6 mn.

We are left with one final adjustment, namely an allowance for an increase in the volume of activity at the hospital since 2000/2001.

29 . We do not need to adjust for the costs of moving from the old hospitals to the new. These costs were £7.5 mn in 2001/02, £4.6 mn in 2002/03 and £1.0 mn in 2003/04 (as shown in the Annual Accounts for these years). As we can see, there were no costs of moving in 2000/01 nor in 2007/08, the two years that we are comparing here.

30 The costs of education, training and research are assumed to be the same as the income received under that heading in each of the years. I have no figures for the years from 1994/95 to 1998/99 inclusive. The figures for each of the years from 1999/2000 onwards are as follows; £4.6mn in 1999/2000; £4.9 mn in 2000/2001; £5.9 mn in 2001/2002; £12.4 mn in 2002/2003; £10.8 mn in 2003/2004; £15.8 mn in 2004/2005; £17.4 mn in 2005/2006; £18.6 mn in 2006/2007; and £18.1 mn in 2007/08. The incomes for those activities are derived from the annual accounts of the NNUH Trust.