03 September 2018 by John Stittle
The NHS’s birthday is marred by a report showing a worrying increase in compensation payments
It was a special day on July 5 this year for the National Health Service – the UK’s state healthcare provider reached its 70th birthday. However, just days after, some of the gloss was taken off its celebrations. NHS Resolution published its annual report and accounts, which showed worrying signs of growing compensation payments that could severely impact upon the NHS activities.
NHS Resolution, the new operating name of the statutorily-created NHS Litigation Authority, is in effect an insurance company acting for NHS trusts and hospitals throughout England. Most cases of clinical negligent treatment are challenged through this little-known body. But over the years the amount of clinical negligence claims both settled and provisions for claims has relentlessly increased.
Although the number of claims seems to be levelling off this year, the financial amount of these claims is at record levels. Just like many commercial organisations, Resolution has adopted IFRS, which determines how these claims are recognised in its financial statements.
“The extent and costs of clinical negligence in the NHS is now weighting heavily on its finances”
In September last year, the National Audit Office (NAO) explained that clinical negligence ‘is the breach of a legal duty of care to a patient by members of the healthcare profession … which directly caused harm to the patient.’ The NAO warned that the ‘government lacks a coherent cross-government strategy … to support measures to tackle the rising cost of clinical negligence.’ Pointedly, the number of new claims has increased from 5,468 cases in 2007–8 to over 10,600 cases in 2017–18.
But what is causing political concern is the fact that Resolution shows the extent and costs of clinical negligence in the NHS is now weighting heavily on its finances. The only slight glimmer of hope came from Ian Dilks, chair of NHS Resolution, who reported that instances of negligence (but not the amount of compensation paid) has broadly ‘stabilised’, at least for this year.
NHS Resolution’s financial statements are heavily affected by IAS37 ‘Provisions, contingent liabilities and contingent assets’. This international standard was originally designed to minimise companies’ opportunity to engage in income smoothing by misusing provisions in their income statements.
Essentially, organisations that have adopted international standards are only permitted to include provisions in their income statement if they have a legal or constructive obligation to do so – as a result of past event and if the provision can be estimated reliability. There are substantial financial amounts involved and many claims extend well into future years.
So it is not surprising that Resolution’s statement of comprehensive net expenditure contains significant adjustments for provisions for negligence. The financial numbers show that, in 2017–18, over £2.23 billion was actually paid to successful claimants, in cash terms. This sum was a worrying 31% higher than the previous year.
However, this payment is a cash flow from Resolution and includes paying some claims from the current year and some claims stretching back historically over previous years. It does not expressly show the amount of unpaid claims that have been recognised and reliably measured and which solely relate to the 2017/18 financial year.
Indeed, there are also incidents that have occurred, but compensation claims have not yet been received – but are expected to be lodged soon. However, as the Resolution chairman alarmingly points out, at current prices, ‘the annual cost of harm’ is now approximately £7–8 billion. This sum includes many claims that are, or may well be, payable in future years – once negligence has been legally established and the terms of compensation are settled.
Even more serious is the large increase in the balance for the provision of liabilities relating to clinical negligence that are building up in the balance sheet. As the provision for negligence increases in the expenditure statement revenue, the annual provision for these liabilities is aggregated in the balance sheet.
“What limited evidence that does exist seems to suggest that many cases of clinical negligence are not even being reported”
At 31 March 2017, the aggregate provisions for these liabilities were reported at £64.9 billion; but by the end of March this year, these liabilities jumped to £76.9 billion – with most of this amount having eventually to be paid to claimants over the coming years. To place this amount in context, the total NHS annual operational budget in England in 2017–18 was just over £125 billion.
However, the accounting methodology adopted by Resolution last year now directly affects how provisions are determined. IAS37 requires the calculation of providing for claimants over future years – such as for staggered compensation awards – is based on discounting these payments to their present values. The accounting rules require the application of ‘a pre-tax discount rate’, which, in the case of Resolution, is determined by HM Treasury.
In the current low interest rate environment, the discount rate has now further fallen from -0.8% to -1.56%. These are exceptionally low (and, indeed, negative) rates, meaning the present value is now often significantly higher than the actual total cash compensation payments. Given the substantial compensation amounts involved – often over several years – a small change in the discount factor can have a very significant impact.
Resolution states that in gross terms, this small change in the discount factor means that total outstanding liabilities have increased this year by £15.6 billion. However, there are additional possible negligence claims that may add to Resolution’s financial plight.
Under IAS37, these potential claims do not meet the criteria to be recognised as a provision but they may be classified as possible contingent liabilities. In such cases, these contingent liabilities, which are disclosed as £46.4 billion, are only shown as a note to the accounts because ‘a transfer of economic benefits is not deemed likely.’ Nevertheless, a small proportion of these claims will almost certainly have to also be paid in due course.
The key issue is why these levels of negligence by clinical staff continue to increase. Even more disconcerting, what limited evidence that does exist seems to suggest that many cases of clinical negligence are not even being reported.
Overall, total outstanding compensation claims now exceed more than a half of the NHS annual operational budget in England. With these levels of costly negligence claims, will the NHS even exist in its present form to celebrate its 80th birthday?