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In critical condition

18 August 2014

News analysis: In critical condition - read more about the NHS' unsustainable liabilities

NHS finances are facing unsustainable liabilities as medical negligence and its associated legal costs spiral out of control.

Most organisations are appalled when they negligently fail to meet at least basic quality standards of customer care – even on just one occasion. If employee negligence continues year after year it is time for an organisation to face reality and establish what is going so wrong.

One organisation that continues to incur ever-increasing liabilities for employee negligence is the UK’s National Health Service (NHS). With potential legal claims, mostly for clinical negligence, now totalling more than £26 billion, the NHS is facing unsustainable liabilities.

Financial plight

Recently published financial statements of NHS liabilities paint an increasingly dire portrait of its financial plight. The monopolistic state healthcare provider is now accumulating colossal financial contingent liabilities as a result of clinical negligence largely incurred by its medical, dental and nursing staff.

The NHS Litigation Authority (NHSLA), a specially created legal body to negotiate and settle claims for damages that largely arise from negligent patient treatment, covers most of the country’s hospitals and hospital trusts. The NHSLA’s financial statements for 2013/14 make worrying reading. The most daunting feature on the balance sheet is the sum of £26.1 billion in liabilities. Most of this arises from creating future accounting provisions for clinical negligence costs and damages. To place this sum in context, the total annual overall operational budget of the NHS in the last financial year reached £109 billion.

Clinical negligence

The NHSLA’s statement of expenditure shows clinical negligence cashflow payments of £1.2 billion. Although this figure is worrying enough, it is only a small part of a complex financial picture. Many of the legal claims are still unresolved, on-going and are often structured compensation payments spread over many years. As a result most cases are excluded from this year’s £1.2 billion cash payments made to patients. The more relevant annual gross claims for negligence and other unadjusted costs in the accounts reach £4.5 billion. Although most of this sum is likely to be payable in future years, it relates to claims and incidents arising or notified in 2013/14, have therefore been recognised in the 2013/14 financial statements. This is an increase on the £3.9 billion unadjusted gross annual cost recognised in 2012/13.

The NHSLA’s financial statements for the year ended 31 March 2014 also reveal the high level of other negligence claims that have been included in provisions to be settled in future years. The financial statements disclose that the most of these provisions relate to damages expected to be paid in more than five years’ time. In other words, many of the actual and expected negligence claims that are recognised in the form of provisions have neither been finalised nor paid to claimants.

International standards

The NHSLA has adopted international financial reporting standards now being used by listed companies. Under the requirements of IAS37, Provisions, Contingent Liabilities and Contingent Assets, provisions are defined as a liability of uncertain timing or amount. The rules are defined strictly by IAS37. It is only possible to recognise a provision if an organisation has a present legal or constructive obligation as a result of past events. However, in addition, the payment must be ‘probable’ and be able to be estimated ‘reliably’. In practice, the application of IAS37 means that most of the provisions in the NHSLA’s balance sheet will eventually have to be met and result in actual cashflow payments.

There is no sign of any improvement in reducing the incidence of harm being caused to patients because of clinical negligence. In the past decade, the situation has deteriorated substantially. In 2003/4, the total NHSLA provisions, for known claims amounted to £7.8 billion. This was mainly for clinical negligence and for incidents incurred but not yet formally reported. By 2013/14, they increased threefold to exceed £26 billion.

Contingent liabilities

There are even more potential liabilities in excess of these provisions. Under IAS37, the NHSLA is also required to disclose any contingent liabilities. The accounting rules define a contingent liability as a possible obligation that depends on the occurrence of some uncertain future event, such as awaiting the outcome of a court case. A contingent liability also exists if there is a present obligation but it is not probable that a payment will be made or if the amount cannot be measured reliably. Using this definition, the NHSLA discloses in the notes to the financial statements, additional contingent liabilities of £11.8 billion – most of which again relate to clinical negligence. Given that these additional disclosures are possible damages payable, it is reasonable to assume that the NHSLA will eventually have some further cashflow commitments – resulting in yet more compensation payments. Assuming the possible liability lies between 0% and 50% – then the expected value (25%) of the extra damages eventually payable could be in the region of £3 billion.

Alarming increase

The growth in the actual number of claims from negligently treated patients continues to increase at an alarming rate. In 2009/10 there were 6,652 new claims for clinical negligence – this figure grew to 11,945 new cases in 2013/14. The number of new claims in just one year is nearly 18% higher in 2013/14, compared with the preceding year. In the NHSLA’s own words, these figures represent an ‘unprecedented number’ of claims and for the first time the NHSLA highlights that it is now currently receiving ‘more than 1,000 claims per month.’

As long ago as 2001, when accounting provisions for negligence were at a relatively low level of £4.1 billion, the National Audit Office (NAO) voiced its concern. The NAO warned then that: ‘The human and financial costs of clinical negligence are enormous.’

Since then, the costs of clinical negligence have continued to rise exponentially, reaching the current level of over £23 billion. In 2013 the NAO noted that one of the major negligence issues concerns maternity care, which: ‘accounted for a third of the clinical negligence bill in 2012/13.’

In particular, the NAO highlighted that almost a fifth of spending on maternity services is to cover clinical negligence. Margaret Hodge, Chair Public Accounts Committee recently described this situation as ‘absolutely scandalous’.

Primary care

Even worse, the NHSLA’s negligence claims do not relate to the provision of primary medical care, outside hospitals, by GPs and dentists. Acting as independent and largely self-employed contractors they provide services to the NHS in return for a fee from the state. These clinicians are not indemnified by the NHSLA for legal claims. As a result, these general medical and dental practitioners normally arrange their own private sector insurance cover to indemnify them for giving negligent treatment to patients. The two largest major insurance organisations in the UK providing insurance cover do not reveal the size of the amounts paid in damages to the patients resulting from clinical negligence.

However, by identifying and extracting the level of insurance premiums received by these insurance companies, it would probably not be unrealistic to estimate that annual damages paid to patients by GPs and dentists was another £400 million to £500 million each year.

Lack of control

It seems that NHS management  has little control over the ever-escalating levels of clinical negligence in NHS hospitals. Whereas most other organisations would immediately exercise much stricter control over the substandard and negligent work practices of their employees, the NHS appears to be at a loss to know how to stabilise the high level of claims – let alone reduce the amount of damages being paid.

One obstacle to reform may be that is that within hospitals the medical and nursing professions are policed largely by themselves. The nature and quality of treatment is left, in practice, to an independent medical profession that can appear more accountable to itself than to employers.

Under the tort of negligence under the common law in England, the level to establish negligence is not a particularly onerous or demanding standard for the medical profession to reach. An earlier case established the so-called ‘Bolam test’ that determined the standard for medical negligence. Under this test, the court held that if a doctor reaches: ‘the standard of a responsible body of medical opinion, he is not negligent.’

However, the latest NHSLA numbers indicate a growing number of clinical cases that are still falling short of reaching the ‘standard of a responsible body of medical opinion’.

Reluctance to litigate

Even more significant is that earlier research, conducted in California, suggested that only a small proportion of apparently negligently treated patients actually seek legal remedies. Even in the more litigious society in the US, patients appeared reluctant to sue their clinicians.

It has been estimated that the number of spurious legal claims for negligence is far outweighed by patients who do not resort to legal remedies. In the UK, in 2001, the NAO found that the Department of Health does not necessarily even inform patients when they have been treated negligently.

The department was reported as saying that it does ‘not see it as the business of the NHS to advise patients that there might be grounds to believe an adverse medical event may have been due to negligence, or suggest patients seek legal advice, or admit liability.’

In other words, it appears that the liabilities in the NHSLA’s financial statements may considerably underestimate the scale of clinician negligence.

With politicians, NHS management and healthcare regulators seemingly having little or no idea about how to reduce negligence claims, the current levels of clinical negligence seems destined to be even higher in coming years. Next year’s balance sheet could well indicate negligence liabilities approaching the £30 billion mark – a level unimaginable just five years ago.

The underlying financial concern is that over the coming years increasing amounts of these liabilities will begin to crystallise and become payable. The impact on the NHS operational budget will make its funding position even more precarious.

John Stittle is a senior lecturer at the University of Essex

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