Jeremy Laurance: Why rationing looms for the NHS

The health service has become a market-based system, but the market has failed to work properly

Like a cracked record, there is only one question that people ask about the NHS these days: where's the money gone?

As ministers wrestle with the details of Britain's largest hospital redevelopment scheme - the £1.1bn Private Finance Initiative (PFI) deal to rebuild St Bartholomew's and the Royal London - the NHS, on which it will depend for its income, is heading for a record deficit.

In January, the health service in England was approaching a £790m overspend by 31 March. This was a significant worsening of the position since last October, six months into the financial year, when it was forecast to be £620m.

Despite bullying, threats and dark warnings about the safety of their jobs, NHS trust and health authority chief executives have proved unable or unwilling to make the necessary savings. Sir Nigel Crisp, the NHS chief executive, is said to have gone, in 12 months, from being Whitehall's blue-eyed boy to a member of the fingertips club.

The nightmare that has haunted Tony Blair since he launched the NHS modernisation programme in 1999 may be coming true. The billions of pounds invested over the past six years have disappeared into a black hole. Not entirely disappeared. There have been important gains. As Patricia Hewitt, the beleaguered Health Secretary, pointed out this week, there are thousands more doctors, nurses and other hospital staff, more hospitals, newer buildings and more beds.

Waiting lists are shorter, treatment is provided faster and patients are seen more quickly in A&E departments than for decades. These are not insignificant improvements. When ministers pledged in 2000, at a time when NHS waiting lists stretched well beyond a year, that no patient would wait longer than six months by the end of 2005, they were roundly mocked.

Yet the target was achieved last Christmas, and the new target, of an overall maximum 18-week wait from GP referral to hospital admission by 2008, no longer looks absurd.

Nothing, however, can conceal the gravity of the situation the NHS now finds itself in. To carry a deficit of £700m to £800m at the start of the new financial year, if that is what it turns out to be, is unprecedented. The inability of chief executives to reverse the worsening trend since last October suggests the problems are intractable.

The Department of Health says the deficits are concentrated in a minority of trusts - around one in four of the total. It remains unclear whether it is worsening across the board or only in the hardest hit trusts.

What has emerged is that the "turnaround teams" ordered into the 18 trusts with the biggest deficits that were named and shamed by Ms Hewitt in January have not come up with anything new. Chief executives are extremely angry that the blame has been heaped on them by the Health Secretary when they say it lies with the Government.

Reasons for the crisis begin with targets - centrally set and with no quarter given to trusts that missed them in the run-up to last June's election. Getting waiting lists down, cancer patients seen in two weeks, A&E waits cut, more heart patients treated, all swallowed bundles of cash.

Eye-watering pay deals awarded to thousands of extra staff account for another large slice of the extra money. Hospital consultants have been delighted but surprised to find an extra £20,000 in their pay packets for doing the same work.

Extra turbulence has been created by the introduction of payment by results - the creation of a tariff covering each treatment so that hospitals are paid for what they do. NHS trusts can no longer predict their income with certainty, as in the past, and the rollout of patient choice - giving patients the right to choose where they are treated - increases the uncertainty.

The billion-pound hospital rebuilding programme, paid for with private finance, is saddling trusts with expensive debt. NHS hospitals in need of redevelopment, such as Barts and the London, have mortgaged themselves to City institutions, at hefty interest rates payable over 25 or 30 years.

One such trust, the Queen Elizabeth in Woolwich, which re-opened four years ago after a £93m rebuilding scheme funded by the PFI, declared itself technically insolvent in December after auditors said it was heading for a deficit of £19.7m this year rising to almost £100m by 2008-9. It blamed its problems on a crippling PFI debt.

Fears about the long-term viability of such schemes lies behind the delay in approving the Barts rebuild. There are 24 PFI schemes complete so far with a total capital spend of £2.1bn, and a further 14 approved to a value of £3bn. But coming behind them is another £12bn worth of schemes, including Barts, awaiting approval .

The question taxing ministers is whether these palaces of disease will be needed 20 or 30 years in the future. In January, Ms Hewitt published a White Paper on primary care which envisages a progressive shift of care into the GPs surgery which will further undermine the hospitals from which it is removed.

The effect of these pressures is that next year will be critical for the NHS. According to official health department projections published in January, 70 per cent of the £5.4bn growth money for 2006-7 will go on pay and price rises. That will leave just £1.6bn for paying off deficits and making improvements such as cutting waiting lists.

In short, some parts of the NHS could find themselves bankrupt next year - like the Queen Elizabeth hospital in Woolwich - with no way of extricating themselves from their financial difficulties. Long-standing problems - hospitals or departments in the wrong places - which politicians and managers have shied away from confronting account for the critical state of some trusts.

In remarks last week, the Prime Minister urged local managers to "grasp the nettle" in reshaping services where they were contributing to deficits - a sign of extra turbulence to come.

But there is a wider lesson from the dismal economic position in which the NHS finds itself, according to Professor John Appleby, chief economist at the King's Fund. Over the past decade and a half, the NHS has become a market-based system, with primary care trusts purchasing care from hospital trusts who provide it. But the market has failed to work properly - the primary care trusts have failed to control spending. That raises a question we have not heard through all the years of record growth - how services are to be rationed. It is a word, and a prospect, that health ministers dread.

j.laurance@independent.co.uk