Capital spending in trusts

Figure 4 shows the declining trend in capital additions across trusts in England, broken down by asset type. The highest levels of spending were in 2010/11, at £5.8bn, of which about three-quarters was on buildings. 2012/13 had the lowest spending, followed by 2016/17 and 2017/18. Most of this fall in spending has been in spending on buildings, while spending on all other asset types has remained relatively consistent.

Figure 4: NHS trust capital additions, 2010/11 to 2017/18 at 2018/19 prices

Source: Health Foundation analysis of NHS trust accounts.

Note: ‘Other’ comprises transport equipment, furniture and fittings, and dwellings.

In trusts’ financial statements, assets are classified as ‘assets under construction’ until they are ready for use. Over this period, buildings continue to make up most of capital spending, since they make up over 80% of assets under construction. This is because construction projects often take more than a year to complete and may be paid for over multiple years.

An increasing proportion of capital spending is on IT. This is the result of an increase in spending on IT, but also a reduction in spending on buildings and the associated fall in overall spending. The increase in IT spending is from ‘intangible assets’ (mostly software licences), which more than doubled since 2010/11. Some IT will also be included in the revenue budget, however this spending is not shown in the financial statements. Since 2010/11, spending on plant and machinery has fallen by 13%. Over this time, NHS trusts have added minimal new land.

In 2017/18, acute trusts accounted for 78% of all capital spending, mental health trusts for 9% and specialist trusts for 8%. By comparison, revenue shares were 75% for acute trusts, 14% for mental health trusts and 5% for specialist trusts. This may reflect the fact that acute and specialist trusts have greater capital need due to the nature of their patient care. The type of capital spending also varies by trust type. In 2017/18, mental health and community trusts spent more of their budgets on IT than acute and specialist trusts, but very little on transport equipment and plant and machinery, reflecting the type of services these trusts provide.

Total value of capital in NHS hospitals

When NHS trusts purchase an asset, it is initially measured at its cost price. Over time, as the asset is used, its value depreciates. This depreciation is measured on a straight-line basis, meaning the value depreciates by the same amount every year over the life of the asset. Assets may also become impaired or damaged through use, which reduces their value. Assets owned by hospitals are re-valued at regular intervals, with the accounts adjusted accordingly. These combine to form a net book value of the asset, reflecting its total value at the end of the year.

Figure 5 shows that from 2010/11 to 2014/15, the value of capital in hospitals increased, though there was a fall in 2012/13. The major increase in 2013/14 is from the consolidation of primary care trusts (PCTs) as trusts brought additional capital onto the balance sheet from absorbing PCTs. Between 2015/16 and 2017/18, the value of capital fell by 3%. Overall, from 2010/11 the value of capital rose by 4%. The composition of the types of capital has changed minimally over this period.

Figure 5: Net book value of property, plant and equipment, and intangibles in NHS trusts, 2010/11 to 2017/18 at 2018/19 prices

Source: Health Foundation analysis of NHS trust accounts.

Note: ‘Other’ comprises transport equipment, furniture and fittings, and dwellings.

In 2017/18, buildings made up 74% of total capital, followed by 10% for land, 6% for equipment and 2% for IT. Intangibles are a separate component, and represent another £1bn of capital. Since 2010/11, the value of buildings has increased by £2.9bn, while the value of land has decreased by £2.3bn. The value of equipment has fallen by 10% since 2011/11, while IT has risen by 19%. Intangible assets, mostly IT software, have risen by 67% since 2010/11.

Since 2010/11, buildings have continued to make up most of NHS trusts’ capital. The 2017 Naylor review into NHS property and estates was commissioned to develop a new strategy for NHS estates. It found that 43% of NHS estates are more than 30 years old, with many not fit for purpose or needing significant upgrades to bring them up to a modern standard. Future capital-spending plans need to provide sufficient support for upgrading NHS buildings.

In 2018, the government announced a vision for digital, data and technology in health and care, with the goal of the UK leading the world in health technology. As Figure 5 shows, NHS trusts have seen a 10% fall in plant and machinery since 2010/11. While IT has increased, it still makes up a very small proportion of the total value of NHS capital, at less than 5%. It is unrealistic to expect the NHS to be a world leader in health technology when its capital spending on health care is much lower than in comparable countries, only a very small proportion of this is spent on IT, and spending on plant and machinery is declining. The National Audit Office has recently highlighted the issue of using complex and ageing IT systems for health screenings, which have led to communication errors in screening programmes.

Financing of capital

NHS trusts receive funding for capital spending from a variety of sources, including PFI and donations. In 2017/18, 76% of the capital owned by trusts was purchased by the trusts themselves, 19% was through PFI, and 4% was donated, with the remainder either from government grants or leased. Donations are not split evenly across all trusts, with a few trusts making up the majority of total capital donations. As we noted above, there is still uncertainty around future funding because of the gap in funding that resulted from the ending of PFI.

In this tight funding environment, trusts have been using assets and equipment longer than predicted. This reduces the amount of depreciation, as the value of the asset depreciates over a long period, and so depreciates less each year. This is one contributor to the relatively flat value of capital. Changes in accounting standards throughout the period will also have had an effect on the values, which is difficult to quantify. Trusts have moved to modern-equivalent asset values for specific types of assets, meaning they can re-value the asset according to the value of replacing it to a similar capacity and function.

Disposal of capital

Trusts sell capital, in the form of assets, for a variety of reasons. Sales are deducted from trusts’ total capital spending, increasing the amount they can spend on capital. The Naylor review recommended that part of future capital plans could be funded through disposals of surplus land.

Figure 6 shows the recent increase in disposals by NHS trusts since 2015/16. The highest value of sales, at £417m, was in 2017/18, more than double some of the earlier years. This compares with £3.6bn in additions in 2017/18. The data in Figure 6 reflect the actual cash received in each year for the sale of assets, which may differ from the net book value. If trusts sell an asset at a different price to the book value, the difference is recorded as a profit or loss for the trust.

While the government has committed to proceeds from sales being re-invested, this is not always the case, and in 2017/18 almost two-thirds of the proceeds from land sales went into the revenue, rather than capital, budget.

Productivity and health care

A common metric used to measure capital levels is capital per worker. As the labour force in the NHS has been expanding, capital spending overall and capital per worker have fallen significantly (known as ‘capital thinning’). Having a higher rate of capital per worker (‘capital deepening’) is generally viewed to be a positive contributor to productivity, with the opposite true of capital thinning. This is because workers can perform their work more efficiently when they have more capital (such as machines).

Figure 6: Sale of capital by NHS trusts, 2010/11 to 2017/18 at 2018/19 prices

Source: Health Foundation analysis of NHS trust accounts. Values taken from cash flow statement. Values may also include sales of investment assets.

Figure 7 shows the change in capital per worker in NHS trusts, with 2010/11 an index year and staff levels based on full-time equivalent numbers. Capital per worker has been declining since 2010/11, with the lowest level in 2017/18: 17% lower than in 2010/11. The fall is much larger for plant and machinery per worker, which has been consistently declining since 2010/11: by 28% in real terms. The only increase has been in assets under construction, which is mostly incomplete building work. IT and intangibles per worker increased during this period, after falling between 2010/11 and 2012/13. These increases were driven by a significant rise in intangibles (which are mostly software licenses).

Figure 7: Change in capital per worker, 2010/11 to 2017/18 at 2018/19 prices

Source: Department of Health and Social Care annual reports, NHS Digital electronic staff records.

Note: 'Worker' refers to full-time equivalent (FTE) staff. Figure compares year-end balances with average FTE in year.

Although it is difficult to quantify the effects of these figures, there is research on the types of capital that are positively linked with productivity in trusts, including IT and equipment. Technology, such as electronic health records, has been associated with improved outcomes.

Even in a labour-intensive industry like health care, the NHS seems to have performed well during this time of reduced capital funding, with productivity rising by 2.1% a year from 2009/10 to 2016/17, including 3% in 2016/17 – a bigger rise than in the wider economy. One reason for this might be that capital investment can take time to deliver productivity gains, meaning this productivity gain could be the result of the large increase in capital spending before 2010. There can also be short-term productivity gains from reducing capital, as inputs (current spending) are reduced relative to outputs, leading to a rise in productivity until output is affected further down the line. The Carter review into variation in the efficiency of acute hospitals noted that trusts view capital investment as a contributor to cost savings, but only in the long term.

Qualitative research commissioned by the Health Foundation finds that many trusts are seeing capital-funding constraints have a direct, negative impact on their ability to deliver optimal care. Staff have reported negative effects on productivity from issues such as equipment shortages and failure. Hospitals are using ageing diagnostic equipment, negatively affecting the ability of clinical staff to perform their work. The research also identifies the built environment as having negative effects on patient care and safety.

Modern technology has the potential to increase productivity within the NHS. For example, digital technology and artificial intelligence may reduce the burden on staff through the automation of repetitive tasks. While the government has committed to a more technologically driven NHS, buildings should also be a focus for improving productivity in hospitals. One example to look to is Denmark, where they have used an expert panel to identify how modern acute hospitals should be designed, making productivity a key metric in design and construction. The built environment must also be considered in the context of the workforce. Buildings that have been well designed can not only improve productivity (for example, by reducing walking times) but also provide a better overall working environment for staff.

A review of the Mental Health Act 1983 found that the physical environment of mental health trusts has been affected by a risk- and infection-averse approach that negates other priorities, such as social interaction and activities.

§§ Once assets under construction are completed, they are reclassified to their respective asset type. Health Foundation analysis of reclassifications since 2010/11 found that over 80% of reclassifications of assets under construction was to 'buildings'.

¶¶ In this publication, the same GDP deflator was used across all asset types, as specific deflators were not available for every type of spending. Although IT spending is flat in cash terms, if specific IT inflation were used, it would be increasing, as IT is becoming cheaper.

*** Although depreciation is straight line, the estimated useful lives can change, which will adjust the amount of depreciation. Land is not depreciated.

††† The additional capital obtained by trusts from absorbing PCTs is not included in additions in Figure 4, as it is a separate item on financial statements.

‡‡‡ Assets below £5,000 are not capitalised, and are expensed. During this period, it is possible that spending on IT expenses increased for low-cost IT, such as software.

§§§ Only foundation trusts can keep all capital money from sales. Trusts and foundation trusts in distress can only keep a certain amount, unless otherwise approved.

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