Capital charges: a tax on the NHS

Under the new national framework for assessing performance in the NHS trusts will be compared partly on the basis of their costs per unit of care and of the productivity of capital estate.¹ Unit costs and productivity of capital are crucially influenced by two factors: the capital charging system under which the government plays shareholder and banker to the NHS, recovering a 6% return on all capital used by the NHS,² and the current and future purchasing decisions of primary care groups. Other changes, however—notably, the private finance initiative and the freedom of primary care groups from capital charges—raise questions about the appropriateness of these measures of efficiency.

The main argument for the introduction of capital charges in 1992 was that NHS assets were being used inefficiently. Requiring NHS trusts to pay interest and dividends on their assets, and to recoup those costs through the prices charged to purchasers, would, it was argued, lead to greater cost effectiveness and allow comparisons to be made between the NHS and the private sector.³ This, however, relies on two arguable premises—firstly, that an NHS provider is sufficiently similar to a commercial enterprise that the imposition of a private sector financial regime will lead to greater efficiency; secondly, that NHS capital charges realistically represent the cost of the buildings and equipment needed to deliver services.

Taking the latter premise first, NHS assets are valued at current value for land and current replacement cost for buildings, plant, services, and equipment rather than at historic cost (which would be the usual practice in the private sector). The effect of this overvaluation of assets is to make capital charges (paid from the trust’s revenue) cripplingly high. The 6% rate was chosen “to ensure that there is no inefficient bias against private sector supply”⁴ and not to reflect the real cost of capital to government. Bringing public sector capital accounting in line with private sector conventions in respect of returns on capital makes the substitution of private for public provision a logical move since it disguises the most significant differences between the two sectors.

What of the incentives for efficiency supposedly created by capital charges? The effect of the system on individual trusts depends on the relation between their income and the asset base on which they pay capital charges: the greater the proportion of a trust’s income taken up by capital charges, the greater the risk of financial non-viability.² On average NHS trusts are paying out 9% of their annual revenue income on capital charges. Only two options exist for adjusting the income:asset ratio: increasing income or reducing assets.

To increase income trusts can compete for market share with other NHS providers or attract private sector income. Competing for market share destabilises neighbouring NHS providers because, without expansion in purchasers’ budgets, trusts can gain only at the expense of other providers.

Trusts can reduce their assets through disposing of them or taking facilities out of service. This has led to capital charging being compared to a “windows tax,” with facilities being withdrawn to avoid charges.⁵ A more radical approach is to liquidate all assets (and thereby avoid paying capital charges altogether) through public-private partnerships and the private finance initiative. Under the private finance initiative NHS assets and land are sold or transferred to private sector consortia which design, build, and operate new hospitals. The NHS becomes a tenant, leasing back the premises and services for 30-60 years.⁶ Payments for the lease of the new hospital and services are financed by land sales, government subsidies,⁷ and, crucially, the capital charges paid by NHS trusts. As they are not public sector assets, private finance initiative hospitals will not be liable for capital charges, but the equivalent of the trust’s current capital charges will still enter into the prices charged each year to purchasers.

This has created a leak of NHS funds from the public to the private sector. Previously the capital charge “returns” the Treasury received from NHS trusts (around £2.5bn a year) were passed to the Department of Health, which included them in health authorities’ revenue allocations for hospital and community health services.⁸ They then entered into payments to NHS trusts, which made returns to the Treasury, thus closing the circle. When NHS services are provided by the private sector, which does not pay capital charges to the Treasury, the funding leaves the system, reducing the annual circulating fund out of which other trusts must make their returns. Unless there is a concomitant increase in NHS revenue to offset this leakage—and so far there has not been—this will lead to the bizarre phenomenon of privately financed hospitals being funded through what is in effect a tax on hospitals in public ownership.

Ironically, the use of the private finance initiative has the potential to increase unit costs since it increases the amount of income that goes on buildings and equipment even while cutting capacity. Bromley Hospitals Trust’s projected private finance initiative lease payments represent 14.7% of its current income, compared with the 11.4% it currently spends on depreciation and capital charges, despite the fact that the trust will reduce acute beds by a fifth.

The shifting of services from acute and community hospitals to the primary sector will have the same effect. General practitioner fundholders (and future primary care groups and primary care trusts) are free of the capital charging regime of the NHS. Since the introduction of fundholding an increasing number of general practitioners are either undertaking, or contracting with the private sector for, services formerly carried out by NHS trusts.

Current policies on disposing of NHS assets and introducing primary care trusts will accelerate these trends. All NHS assets deemed surplus to requirement have to be offered first to other NHS bodies. Around the country fundholders with private sector backing and NHS revenue are buying up this surplus NHS estate. As primary care trusts develop, general practitioners with a cash limited budget may be tempted to mortgage NHS community trust sites to the private sector under private financing arrangements and to gain a commercial stake in the enterprise. The transfer of NHS assets to private ownership and management is, of course, ultimately funded from NHS revenue. The effect will be to create serious financial instability in NHS trusts and potential for enormous inequities in access to service provision.⁹

Concerns about the potential effects of public-private partnerships and primary care trusts are not misplaced. The direction of current policy suggests that in the medium term many NHS assets will transfer to private ownership. The question is whether, as with long term care, liquidating public sector assets will be followed by the privatisation of the costs of care.¹⁰