Trends and assumptions: the NHS Litigation Authority's final accounts


One of the less publicised factors contributing to the financial pressure faced by the NHS is the cost of compensation payments in cases of negligence. The risks involved are dealt with collectively by the NHS Litigation Authority, which operates at arm's length from the Department of Health. 

Its main functions are to provide a litigation service through which all NHS hospital provision in England has indemnity cover against clinical negligence claims and to help the NHS to better manage clinical risks so as to help reduce the number and severity of claims. The NHS Litigation Authority has just issued its accounts for 2015/16, and these provide a good illustration not just of the trends but of the impact of accounting assumptions. 

Headline changes since last year

   2014/15 2015/16 
Cost in year of dealing with claims, £bn 1.1 1.5 
Provision in accounts (year end) for future claims, £bn 28.6 55.4 

These figures give rise to three key questions:

  1. Why have in-year payments – paid by the NHS Litigation Authority but funded by recharges to the NHS – gone up by 36%? 
  2. Why has the assessment of long-term liabilities almost doubled? 
  3. What can be done to reduce future costs?

In-year payments haven’t increased because there are more new cases. Rather, cases already in the system are turning out to cost more, and associated legal fees are increasing. Those factors more than offset a 4.6% reduction in the number of claims, from 11,497 in 2014/15 to 10,965 in 2015/16.

The most prominent media coverage was in The Sun, which led with ‘Legal fees paid by NHS to ambulance-chasing lawyers almost double compared to patient pay-outs’. Setting aside the histrionics of ‘ambulance-chasing’, this was true enough. As the paper went on to explain:

"The NHS paid £950.4 million in compensation last year as a result of clinical negligence claims – up 23 per cent on 2014/15.

But the amount paid to the victims’ legal teams rocketed by 43 per cent over the same period to £418 million.

Defence costs also rose 16 per cent to £120 million – giving a total bill to the health service of £1.49 billion."

This is, however, a rather narrow view of the relationship between legal fees (which also include expert witness costs) and payments to patients. More investigation would be needed to say if it’s a bad thing. First, because additional legal spending might be worthwhile if it reflects a more thorough process bringing about fairer settlements, rather than simply inflating lawyers’ incomes for no reason. Second, because those payments are typically spread over whole lifetimes to pay for the ongoing care costs caused by clinical errors.

It might, for example, be possible instead to relate legal costs to the future liabilities identified:

   2014/15 2015/16 
Legal costs, £bn  0.394 0.538 
Future liabilities at year end, £bn 28.6 55.4
Legal costs as percentage of future liabilities 0.0138% 0.0097%

This comparison shows there has been a 30% reduction in the small proportion which one year’s legal costs represents of total forecast future costs. It doesn’t take much spotting, of course, that the reason for that is the huge increase in the assessment of future liabilities. And that is a reflection of the impact of accounting treatments rather than a substantive change. The underlying change in that assessment is an increase of £2.5bn, but that is dwarfed by the £25.5bn effect of reflecting the Treasury’s latest discount rate, which has resulted in an increase of £25,473m in provision (£9,499m for known claims and £15,974m for the trend-estimated assumption for future claims). That has the effect of reducing the discount applied to the future cost of the money with which those assumed claims will be paid.

The position as at 31 March 2015 was based on a 2.2% discount rate for cash flows more than ten years away, whereas the 31 March 2016 figures are based on -0.8%, a huge and somewhat surprising shift which has had a commensurately large impact. But as the NHS Litigation Authority’s annual report says: "The change in the year of £25.5 billion is an accounting adjustment rather than a measure of harm in the year but nevertheless the resulting provision of £56.4 billion reflects the true cost to the NHS in today’s prices of the long term damages payments that we agree to pay, stretching out decades into the future (over three-quarters of our liabilities will be paid in 2021 and beyond) in today’s world of low interest rates".

So, however they are reported, could the costs be reduced? Answering that is the other key part of the NHS Litigation Authority’s remit, but it seems to be clear where to focus: almost half the costs arise from brain-damage in newborns, so one would expect that every action would be taken to reduce the incidence of such events. On the face of it there is a long-term potential to save up to £700m annually if the right actions and investments can be made. 

Yet even if changes could be identified where investment would deliver a solution it is not financially easy to justify long term investment in the current hard pressed financial world – and the benefits would be years away, as the costs actually paid out by the NHS will continue to be driven by historic cases (which often take up to ten years to settle) for many years to come. And that, in turn, might stand in for the dilemma faced across the health and social care system as a whole: how can we free up the resources to make the right long term investments when the immediate problems, which are so intense, won’t be affected?