The cost and price of the NHS

This is one of the subjects which forces me to be earnestly serious, partly because it still bends my brain and it's something I end up explaining a lot. So for this blog edition there is actually some signposting, partly to keep my own editorial mind in check because I've written this 4 times and each time it's ended in a mess and been binned. I have had to treat this like writing a journal article and have added in REFERENCES. I'm sorry pals but it's both complex and complicated and my brain hurts.

After 20 years of learning about how all this works I still find simmering the complexity down hard.

But onwards we must.

Firstly I'm going to try and outline how decisions on global amounts of money are made. By that I mean how the politicians decide how much to spend on it (and how they spin that).

The second part next week focusses on how that money then cascades throughout the service and the various different formulae which dictate that along with how contracts and PbR and things of that ilk work.

There will be diagrams.

I hope you find this useful and not soul crushingly dull. I find returning to stuff like this on the run in to a budget a reminder that there probably isn't a number sorted for the NHS yet. It's probably still in the 'furious argument' stage between treasury and DHSC.

If it raises more questions than it solves then please tell me. I want this stuff to be useful.

So onwards into the first stage of proceedings - how do we get to an initial number from the corridors of power. I imagine it starts like this.

HM Treasury’s Spending Review – Setting DHSC’s Budget

Spending Review Process: Every few years (or in single-year reviews), HM Treasury conducts a Spending Review to set multi-year Departmental Expenditure Limits (DELs) for each department, including the Department of Health & Social Care (DHSC)[1]. HM Treasury’s spending teams lead this process, advising ministers on how to allocate funds between departments and within them[2]. The Spending Review covers predictable spending (e.g. NHS salaries, medicine costs, capital projects) while demand-led budgets (like welfare) are handled separately[1]. The outcome is a negotiated settlement for DHSC – essentially the total budget DHSC will get each year over the period. Importantly, Spending Reviews are a “statement of intent” and take effect through annual budgets approved by Parliament[3].

• Priority Setting: Government priorities heavily shape the DHSC settlement. At the start of a review, the government defines key outcomes or missions for health and care. For example, Spending Review 2021 explicitly tied funding to a “triple aim” for the NHS: tackling the elective backlog, delivering the NHS Long Term Plan, and continuing the COVID-19 response[4]. Departments and the Treasury agree on priority outcomes and metrics to ensure money delivers tangible results[5]. Ministers scrutinize how each spending proposal will contribute to these outcomes, and evidence linking spending to results is a core part of decision-making[5]. In practice, this means DHSC must show how extra funding will improve services (e.g. reduce waiting times or improve cancer care) in line with government objectives.
• Economic & Demographic Modelling: Economic forecasts and demographic models inform how much funding the NHS is likely to need. DHSC and HM Treasury consider factors like population growth, aging, and health cost inflation when setting the budget. For example, DHSC maintains demand models that project future costs – a model is used to estimate the cost of maintaining adult social care given an aging population and rising unit costs over the Spending Review period[6]. Similarly, models estimate health care costs by age group to anticipate pressures as the population ages[7]. However, demographic change is only part of the story – it accounts for roughly one-third of annual increases in NHS demand, while other factors (like new medical technologies and rising public expectations) drive the majority of cost growth[8]. The Office for Budget Responsibility and other analysts provide spending projections that HM Treasury uses as a baseline for negotiations. In short, demand modelling and economic forecasts help size the funding needed to maintain services and meet new demands in the coming years.
• Political Influences: Ultimately, political decisions and commitments play a significant role. Governments often pledge specific expansions or improvements – for example, hiring 50,000 more nurses or building new hospitals – and these commitments influence the DHSC budget. Such pledges can elevate health spending above a purely technocratic calculation. Likewise, if healthcare is a voter priority, the Chancellor may choose to protect or boost the NHS budget even as other departments face cuts. In recent times, health spending growth has been higher than many other areas. The Chancellor’s decisions are also constrained by overall fiscal targets (e.g. debt and deficit rules), meaning the health budget must fit within what the Treasury deems affordable[9]. The result is a balance: funding is boosted to address critical priorities, but not without limits. For instance, the 2022 Autumn Statement had to grapple with high inflation and economic pressures, yet it found an extra £3.3 billion for the NHS in each of 2023/24 and 2024/25 – but in return the government expected the NHS to find efficiencies and improve performance (e.g. faster ambulance response and GP access)[10][11]. This reflects how political priorities (supporting the NHS) are weighed against economic realities.
• Negotiation and the DHSC Bid: The DHSC prepares a Spending Review bid laying out what funding it believes is needed to deliver services and new initiatives. This involves DHSC (often alongside NHS England) detailing cost pressures – for example, backlog recovery costs, staff pay, capital investment needs – and the consequences if funding is inadequate. HM Treasury’s spending team then scrutinizes this bid line-by-line, often challenging assumptions and asking for efficiency improvements[2]. Throughout summer and autumn of a review year, there are rounds of negotiation: officials and analysts from DHSC and Treasury meet to reconcile differences, and major issues get elevated to negotiations between the Chancellor and the Health Secretary (and ultimately the Prime Minister for big trade-offs). In these talks, trade-offs are made. DHSC might secure extra funding for a priority area but agree to savings elsewhere or to reform how services are delivered. For example, the Spending Review 2021 settlement for DHSC reached £177.4 billion by 2024/25, a £43.9 billion cash increase from 2019/20, but it was structured to target specific needs[12]. It earmarked £9.6 billion over 2022–25 for COVID-19 programmes and £8 billion for tackling the elective waiting backlog[12] – signaling Treasury’s conditions that new funding must go toward these urgent priorities. In essence, DHSC “wins” a larger budget by convincing Treasury that the money will be well-spent on government priorities, and the Treasury secures agreements that the NHS will deliver on key targets within that funding. Treasury officials then advise and brief ministers, who collectively decide the final totals. Once agreed, the outcome is the DHSC Spending Review settlement. This is where we are now.....
• Outcome of the Settlement: The final Spending Review outcome is announced by the Chancellor and published in a budget document. This sets out DHSC’s multi-year budget limit and often references what it will achieve. For example, the SR2021 settlement meant DHSC’s resource budget would grow ~4% per year in real terms[13] – enough to fund the NHS England budget rising about 3.8% per year (to £152 billion by 2024/25)[14] – and included capital investment increases of ~3.8% real annually (reaching £11.2 billion for new hospitals and equipment by 2024/25)[15][16]. These increases were higher than the austere 2010s, but still modest relative to historical NHS growth[17]. Crucially, the settlement is fixed unless reopened by a future fiscal event. The Treasury made clear in 2025 that the funding envelope “will not be reopened” – any new ambitions (like cutting waiting lists to 18 weeks) must be met through that existing budget[18]. This underscores that once the DHSC budget is set, DHSC and the NHS must “live within its means”, prioritizing within the allocation. In summary, HM Treasury determines DHSC’s funding through a mix of priority-driven budgeting, evidence-based modelling, political bargaining, and negotiated conditions, culminating in an agreed envelope that aims to balance health needs with fiscal discipline.

In summary, the flow of funds goes from HM Treasury’s big-picture decision, to DHSC’s budget, through a mandate to NHS England, and then via needs-based formulas to local NHS bodies (ICBs), and finally to providers and services. Each stage is governed by formal processes and timetables: the Spending Review sets the long-term funding path, the annual Autumn Statement/Budget and mandate translate it into an operational budget with priorities, and NHS England’s planning and allocation process ensures the money is distributed fairly and used to meet national and local health goals. Throughout, there is oversight by HM Treasury (to enforce overall spending limits) and by DHSC and NHS England (to ensure the funds deliver the intended health outcomes). By using modeling and formulas – such as the weighted capitation formula for ICBs and the Carr-Hill formula for GPs – the system tries to allocate resources in line with population needs and policy priorities, all within the financial envelope set by the Spending Review. This structured approach, backed by the latest (2023/24–2024/25) guidance and reviews, underpins how funding gets from the Treasury’s coffers to the frontline NHS[21][28].

This pans out to the following slices for 2023/4

1. HM Treasury. Autumn Budget and Spending Review 2021: documents. GOV.UK. https://www.gov.uk/government/publications/autumn-budget-and-spending-review-2021-documents/autumn-budget-and-spending-review-2021-html
2. The Health Foundation. Spending Review 2021: what it means for health and social care. https://www.health.org.uk/reports-and-analysis/analysis/spending-review-2021-what-it-means-for-health-and-social-care
3. Institute for Government. Spending Review 2021: what it means for public services. https://www.instituteforgovernment.org.uk/article/explainer/spending-review-2021-what-it-means-public-services
4. The King’s Fund. The Autumn Budget and Spending Review 2021: what it means for health care. https://www.kingsfund.org.uk/insight-and-analysis/blogs/autumn-budget-spending-review-2021-mean-for-health-care
5. NHS Confederation. Autumn Budget and Spending Review 2021. https://www.nhsconfed.org/publications/autumn-budget-and-spending-review-2021
6. The King’s Fund. The NHS Budget and How It Has Changed. https://www.kingsfund.org.uk/insight-and-analysis/data-and-charts/nhs-budget-nutshell
7. NHS England. Road to recovery: the government’s 2025 mandate to NHS England. GOV.UK. https://www.gov.uk/government/publications/road-to-recovery-the-governments-2025-mandate-to-nhs-england
8. NHS England. 2025/26 priorities and operational planning guidance. https://www.england.nhs.uk/long-read/2025-26-priorities-and-operational-planning-guidance/
9. HM Treasury. Spending Review 2025 – phase one: document. GOV.UK. https://www.gov.uk/government/publications/spending-review-2025-document/spending-review-2025-html
10. HM Treasury. 2025 to 2026 financial directions to NHS England. https://assets.publishing.service.gov.uk/media/67ea537396745eff958ca070/dhsc-financial-directions-to-nhs-england-2025-to-2026-print-ready.pdf
11. HFMA (Healthcare Financial Management Association). Chapter 12: How the NHS is financed. https://www.hfma.org.uk/system/files/chapter-12---hfma-introductory-guide-to-nhs-finance.pdf
12. Building Better Healthcare. Budget and Spending Review 2021 – what it means for health. https://buildingbetterhealthcare.com/budget-and-spending-review-2021-what-it-means-for-health-180223
13. Pinsent Masons. UK spending review: health and social care boost ‘positive’. https://www.pinsentmasons.com/out-law/news/spending-review-health-social-care
14. Health Foundation. What does the Spending Review really mean for health and care? https://www.health.org.uk/features-and-opinion/features/what-does-the-spending-review-really-mean-for-health-and-care
15. HM Treasury. Autumn Budget and Spending Review 2021 (CP 544) – Full document (PDF). GOV.UK. https://assets.publishing.service.gov.uk/media/61c49602e90e07196a66be73/Budget_AB2021_Web_Accessible.pdf
16. House of Commons Library. Autumn Budget and Spending Review 2021: A summary. https://researchbriefings.files.parliament.uk/documents/CBP-9351/CBP-9351.pdf
17. HM Treasury. Autumn Statement 2022: documents. GOV.UK. https://www.gov.uk/government/publications/autumn-statement-2022-documents
18. Office for Budget Responsibility. Economic and Fiscal Outlook – November 2022. https://obr.uk/efo/economic-and-fiscal-outlook-november-2022/
19. Institute for Government. Departmental budgets (DEL and AME) – explainer. https://www.instituteforgovernment.org.uk/explainer/departmental-budgets
20. Office for Budget Responsibility. Departmental expenditure limits (DELs) – explainer. https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/departmental-expenditure-limits/
21. HM Treasury. Public Expenditure Statistical Analyses 2022 (PESA) – methodology and tables (PDF). https://assets.publishing.service.gov.uk/media/62d66ff2e90e071e77244595/E02754802_PESA_2022_elay.pdf
22. UK Parliament Treasury Committee. Autumn Budget and Spending Review 2021 – report and evidence. https://publications.parliament.uk/pa/cm5802/cmselect/cmtreasy/825/report.html
23. Institute for Government. How to get to grips with departmental budgets (guide). https://www.instituteforgovernment.org.uk/publication/how-grips-departmental-budgets
24. House of Commons Library. Autumn Statement 2022: A summary. https://commonslibrary.parliament.uk/research-briefings/cbp-9678/
25. The Health Foundation. New analysis shows NHS budget squeezed by inflation and population. https://www.health.org.uk/press-office/press-releases/new-analysis-shows-nhs-budget-squeezed-by-inflation-and-population
26. Institute for Fiscal Studies. The past and future of UK health spending. https://ifs.org.uk/publications/past-and-future-uk-health-spending
27. Nuffield Trust. Down payment or making ends meet? NHS financial pressures in the run-up to the Spending Review. https://www.nuffieldtrust.org.uk/resource/down-payment-or-making-ends-meet-nhs-financial-pressures-in-the-run-up-to-the-spending-review
28. Institute for Government. The NHS productivity puzzle (report). https://www.instituteforgovernment.org.uk/sites/default/files/2023-06/nhs-productivity-puzzle_0.pdf

Sorry about all that - I did warn you that it would be earnest and detailed.

Back to normal service now.

In current NHS news, there's still huge delays in the restructure of The Department. From conversations at HETT it's also transpires that there doesn't seem to be anything like a plan for it. Nor a plan for a plan.

I'm quoting Andy Cowper here

We have Schrödinger’s NHS England, which exists in a quantum super-position of simultaneously being imminently abolished and directing everyone and everything to drive a return to financial balance.

Quantum mechanics is exciting stuff, and perhaps one could construct an argument that this attempt at quantum NHS management is also exciting.

It is, however, not exciting in a good way.

He is bang on the money as always - we are in the power vacuum that ensues when you depose the current regime without having a new idea on structures and functions. Which is why we are back to more retro ideas like league tables. Which didn't work last time (or the 2 times before that) and that the stats nerd in me (which is all of me) wants to shout from the rooftops that it is reductive and inherently flawed.

It also DOESN'T TALK ABOUT DATA QUALITY

And that my friends, is a call back.

As for what I've been up to

• I've been to HETT with Annie - we managed a day at the conference which accommodated us beautifully - before having the worst night with her (aside from when we were blue lighted into hospital) and subsequently didn't make the next days festivities. It was hard not to take Ming Tangs talk of "ugly babies" personally when you are holding the only baby in the room. I covered Annies ears.
• I've been re-reading Edith Summerskill's 'Letters to my Daughter' which is depressingly still relevant today. It's stirring some action - more on that soon...

Thanks for getting to the end of this one pals. It's been a bit of a slog for both of us.

Part 2 is next week and is about how that cash goes down from NHSE to organisations - any suggestions for the next slab of discourse is welcome. I'll also have looked at the Medium Term Planning Framework published today https://www.england.nhs.uk/publication/medium-term-planning-framework-delivering-change-together-2026-27-to-2028-29/