Funding and finances

The NHS is in the middle of the longest and deepest funding squeeze in its history. While the extra funding promised in the Conservative manifesto is welcome, spending on health will still fall as a percentage of our national wealth until 2022/23. NHS trusts made significant progress in reducing the provider sector deficit in 2016/17 as a result of a clear plan, financial support and a lot of hard work from trusts on the frontline. However, heavy dependence on one-off and non-recurrent savings, and much lower funding increases for the coming years, suggests trusts will struggle to eradicate the provider sector deficit. The National Audit Office (NAO) is right to argue that the NHS still does not have a clear, credible plan to match what is required of the NHS to the funding available.

The provider challenge

Progress on reducing the deficit

After ending the 2015/16 year -£2.45bn in deficit (though the underlying deficit was, in reality, around -£3.7bn), the NHS provider sector was set a target of reducing the deficit to -£580m by the end of March 2017. This was considered a key strategic priority for the NHS in 2016/17. Official quarterly figures published in June 2017 by NHS Improvement revealed the sector ended the year with a deficit of -£791m. This is just under 70% less than the deficit in 2015/16 and a substantial improvement on the third quarter forecast issued in February 2017, which stood at -£886m.

Despite the challenge of seven years of stretching cost improvement programmes, trusts have again managed to increase the level of cost improvement gain they made. In 2016/17 they realised £3.1bn of cost improvement gains, an increase of £208m, 7% compared to the previous year. This equates to 3.7% of turnover, an impressive performance.

One of the key areas of success has been reducing spending on agency and temporary staff, where following the Francis review and the need to recruit more staff, total spending in this area had risen to £4bn per year. In 2016/17, trusts reduced these costs by more than £700m - 24% - compared to the year before, with 85% of providers reporting a year-on-year reduction in their agency expenditure.

This stronger performance is reflected in our survey of chairs and chief executives. When asked how they expect their trust’s finances to develop over the next six months, a quarter predicted they would improve. A third expect their trust’s finances to deteriorate, while most (41%) expect their finances to stay the same.

The number of trusts in deficit at the end of 2016/17 was 105 compared to 153 in 2015/16.

This stronger performance has depended on the introduction of a new financial regime including £1.8bn sustainability and transformation funding linked to centrally set control totals for each trust. This regime was described as temporary, not least because of the potential distorting effects and loss of provider autonomy that it brings.

Reliance on ‘one-off’ savings

Despite these improvements, trusts are concerned about the sustainability of a deficit reduction approach that is highly dependent on short-term, non-recurrent, actions such as land sales, capital to revenue transfers and accounting adjustments.

In an NHS Providers survey of finance directors in February 2017, two-thirds of respondents said they were highly reliant on these one-off measures to reach their year-end financial position. We estimate that c.£1bn of savings in 2016/17 were likely to be non-recurrent.

Impact of reduced capital funding

The NHS is capital intensive, requiring significant investment to maintain buildings, modernise facilities, invest in new treatments and IT and fund much-needed transformation. In his review of NHS property and estates, Sir Robert Naylor concluded that a minimum £10bn of additional capital funding will be needed to support the sustainability and transformation partnership (STP) process and clear the maintenance backlog that has been allowed to build up in recent years. Prolonged underinvestment including using capital to subsidise revenue has now become unsustainable, as highlighted by the NAO in a recent report. 

In its 2017 budget the government made an initial investment of £100m in A&E departments, £325m in transformation funding, and announced its intention to provide further capital funding. NHS trusts and NHS system leaders need to work together to create a compelling investment proposition for the November 2017 budget. It is particularly important that the government takes a realistic view of how much can be generated from land sales and how quickly. It must also recognise that the majority of the value freed up from land sale will be geographically concentrated in London.

Financially challenging 2017/18 and beyond

Frontline NHS funding is due to drop from the 3.8% increase in 2016/17 to +1.4% in 2017/18, +0.7% in 2018/19 and +1.3% in 2019/20, providing a significantly greater challenge. While all extra funding is welcome, the government’s manifesto commitment of £8bn for the NHS is unlikely to make a significant difference to the degree of extra challenge the NHS will face. As the Nuffield Trust and others have pointed out, the increase would not keep NHS spending rising in line with the wider economy, and falls far short of keeping up with costs and demand.

Trusts therefore start 2017/18 with a larger than planned deficit and, on average, a 4.2% CIP saving requirement – up from 4% last year. The NAO, public accounts committee and others have stressed the importance of setting realistic savings target and that the 4% efficiency target previously set for trusts was “unrealistic and damaging to trusts’ finances”.

Funding for winter pressures

Following challenged NHS performance last winter, the 2017 budget committed £2bn of extra funding to councils in England over the next three years to spend on adult social care services to help ensure people receive the support they need and also relieve pressure on the NHS. £1bn will be available this year. The budget said that “local councils will need to work with their NHS colleagues to consider how the funding can be best spent”. An NHS Providers survey published in June suggested that while 28% of trusts have secured a commitment that should help reduce delayed transfers of care, the remainder were unlikely to benefit from this extra social care money. As a result, 43% of trusts were concerned about their ability to manage the risk to patient safety in the coming winter.

Improvement and support

NHS Improvement continues to provide a mixture of financial oversight, regulation and intensive support for trusts. Since our November 2016 report, two trusts have come out of financial special measures but a further three have now gone in, leaving nine still in the regime. It is still too early to tell whether the financial special measures regime is a consistently effective tool and there remains a concern that trusts are sometimes placed into special measures due to wider system financial issues that are beyond their control. A number of trusts have participated in two rounds of a financial improvement programme with a third round currently in design.

What providers need

• A realistic strategic plan for the rest of the parliament and a more detailed plan for the next two years which honestly sets out what can be achieved for the funding available. This needs to include an achievable trajectory to recover provider sector financial balance.
• A new longer-term financial regulatory framework, to replace what was always intended to be a short-term sustainability and transformation funding/control total regime. Provider autonomy must sit at the heart of this framework and we need to return to the days when the average trust, performing well, was able to produce a 4% surplus, enabling it to invest in the improvement of services. As part of this framework we also need to decide how the £1.8bn sustainability and transformation funding will be mainstreamed.
• Short-term, the NHS needs to quickly review where the extra £1bn social care funding will have the required impact and then develop and fund an alternative plan to create the required capacity across the whole system to manage next winter safely.
• A capital investment plan, which recognises the £10bn investment need identified in the Naylor report. This plan must take a realistic view of how much can be raised from land sales how quickly and strike the appropriate balance between government funding, land sale income and third-party capital.
• A rapid review of the estimated £5.6bn that is spent on non-frontline care in the Department of Health, its arm’s length bodies, and in commissioning. It should set a clear target and timetable of how much should be reallocated to the frontline.

A programme of investment is needed to provide trusts with the capacity and capability they need to realise the more complex savings that have been identified in the Carter review.