This section details the possible costs of restoring provider finances, including:
- existing provider deficits
- non-recurrent cost improvement programmes (CIPs)
- backlog maintenance.
Existing provider deficits
Table 8
The prime minister said that the new money should ensure that "over the medium term no NHS organisation is in financial deficit". This would be a welcome outcome: new money is most likely to reach patients when it is not being used to shore up providers’ financial bottom lines. And, it is important that we return to a normal position of trusts breaking even or generating a surplus for reinvestment as quickly as possible.
The consequences of providers being in the red for an extended time are:
- money diverted from capital budgets, delaying maintenance and investment in improved, modern models of care
- cash reserves running low, which leads to late payment of suppliers and a hand-to-mouth reliance on working capital loans from the Department of Health and Social Care (DHSC) to ensure staff and bills can still be paid
- a less strategic approach to efficiency savings, with too much focus on the in-year position rather than long-term transformation.
When it becomes normal for trusts – as it is the case for the acute sector currently– to be in deficit, the link between good leadership and sustainable organisations is broken. If well-led trusts have little hope of lifting themselves out of deficit, the financial framework keeping them in that situation loses credibility – this matters if the overall financial governance of the health service is to be taken seriously. The current situation is in no-one’s interests and must be rectified as part of the new funding settlement.
The prime minister said that the new money should ensure that "over the medium term no NHS organisation is in financial deficit". This would be a welcome outcome: new money is most likely to reach patients when it is not being used to shore up providers’ financial bottom lines.
In 2017/18 the provider sector deficit stood at £960m, after the application of the sustainability and transformation fund (STF). This was a deterioration of nearly £200m on 2016/17. At a headline level the sector deficit has only fallen from £2.5bn in 2015/16 because of the £1.8bn STF.
In recent years the trust sector deficit has been offset by surpluses elsewhere in the Department of Health and Social Care group – most significantly in NHS England.
In 2017/18, NHS England finished the year with a £955.3m underspend – mostly driven by savings in its own running and central programme costs and direct commissioning budgets. The underspend included a £640m risk reserve held back from commissioner-side spending.
It is prudent to keep a risk reserve in order to stop the DHSC overall exceeding its departmental expenditure limit. However, even if £640m was held back every year, that still leaves an additional £315m that could have been released to providers in 2017/18, at no extra cost to the Treasury, which could have reduced the provider side deficit to £645m.
We therefore calculate the cost of eliminating provider deficits as being between £645m and £960m, depending on how big a risk reserve should be held by commissioners.
In 2017/18, NHS England finished the year with a £955.3m underspend – mostly driven by savings in its own running and central programme costs and direct commissioning budgets.
Non-recurrent CIPs
Trusts have risen to an unprecedented and prolonged efficiency challenge in recent years, and delivered productivity gains that far outstrip those seen in the wider economy. But a growing proportion of savings are being delivered through one-off measures, and it is not realistic to assume that this can sustainably continue.
Indeed, the rising proportion of cost improvement plan savings being delivered non recurrently is the clearest sign that the requirement for increased efficiency is outstripping trusts’ ability to safely deliver real cost reductions.
Table 9
Source: NHS Improvement quarterly reports (2015, 2016, 2017, 2018)
In 2017/18, £842m of the £3.2bn total provider sector efficiency gain was delivered via one off measures such as deferring investment, recruitment freezes or land sales. These are not typically actions that directly improve patient services and effectively add to the pressure on trust budgets in future years.
The increasing reliance on measures such these is further evidence of an over-stretched system pushed into increasingly short term cost savings, when a more strategic approach would be preferable.
Ideally trusts would reduce the level of non-recurrent savings they make. If non-recurrent measures did not count at all towards a trust’s annual efficiency savings, it would be necessary to find an extra £842m a year. Alternatively, it could be argued that non-recurrent CIPs should ideally not exceed the planned level. In 2017/18 this was £316m, less than 10% of the total cost improvement savings for the year, and would require £526m.
Backlog maintenance
Table 10
The NHS needs to start investing in its estate again. While there is a need for new spending on facilities and technology that will enable services to transform, it is also necessary to restore the amount spent every year on maintaining the existing estate. Trust leaders say that not being able to spend on maintenance is in some instances beginning to affect their ability to deliver safe care because facilities do not meet modern standards and are deteriorating. A long-term capital settlement to go alongside the revenue announced by the prime minister is expected to be announced separately. The 2017 budget did allocate extra capital funding to the NHS, but it will not be enough to recover routine maintenance. The consequences of this are wards that are not in an appropriate condition to treat patients and equipment that should have been replaced years ago breaking down, with the knock on effects of appointments being cancelled and facilities temporarily closed for emergency repairs. If we do not restore maintenance spending, this will become increasingly common.
While there is a need for new spending on facilities and technology that will enable services to transform, it is also necessary to restore the amount spent every year on maintaining the existing estate.
However the erosion of trusts’ cash positions and the repeated raids on capital budgets – totalling £1.2bn in 2016/17 (HM Treasury, 2017), has meant trusts have not been able to maintain spending on facilities.
The government has promised the NHS a £10bn capital package, in line with the recommendations of last year’s Naylor review on property and estates. This is a welcome acknowledgement of the need both for a proper strategy for NHS estates spending, and for extra money. However, it is not the capital needed to clear the backlog, because around two-thirds of the £10bn would come from land sales and private capital. Land sales would not necessarily generate cash for the trusts with the biggest backlog maintenance; they may take years to bring in money whereas the backlog issue is urgent; private capital will more likely fund new and transformational facilities rather than repairing old ones.
The 2017 autumn budget provided a £3.5bn increase in capital funding, to be spread over five years, of which £2.6bn was to be allocated to sustainability and transformation partnerships to aid integration and enable systems to better meet future demand. While welcome and necessary, this is not the same as backlog maintenance (HM Treasury, 2017).
A £700m pot has been earmarked for the trusts with the biggest challenges, and urgent maintenance issues have been identified as one possible use for this money. If all of this went on the backlog, it would amount to £140m a year for five years.
The government has promised the NHS a £10bn capital package, in line with the recommendations of last year’s Naylor review on property and estates. This is a welcome acknowledgement of the need both for a proper strategy for NHS estates spending, and for extra money.
However, this would cover only a fraction of the £5.5bn total backlog maintenance figure for the NHS in England in 2016/17.
It should be noted that even in 2009-10, before the onset of the current funding squeeze, the NHS had a maintenance backlog of £4bn, and that this figure remained roughly static up to 2013-14. However, in previous years, trusts were able to spend enough each year to stop the backlog growing. This has not happened in recent years. Investment in backlog maintenance has fallen in each year since 2012-13, and the backlog has grown substantially in each year since 2014-15.
The table below shows the increase in backlog maintenance in recent years. It demonstrates:
- the overall backlog is rising.
- overall growth is outstripped by growth in the significant and high risk backlog
- the amount spend on maintenance has consistently fallen
- High and significant risk now account for half of the total backlog, where at the beginning of austerity it was less than a third.
Figure 4
Table 11
This situation is not sustainable. Based on the last two years, the backlog can be expected to rise annually by around £600m a year, while investment remains closer to £300m. An increase in annual routine maintenance spending of around £250-300m will be needed to keep pace with this growth.
The cost of clearing the high risk and significant risk backlog, based on 2016/17 figures, is £2.7bn. Profiled across three years, that is £913m a year.
Pay rises for doctors
Table 12
The Agenda for Change pay deal agreed earlier this year has been funded by the Treasury, although the additional funding for this is within the increased NHS England budgets from 2019/20 onwards. This has already been agreed by ministers, the service and non-medical staff.
However an additional cost pressure looms in the form of a pay rise for doctors. A proposal is expected to be announced this summer.
The overall allocations for the NHS as a whole in the current spending review assume that pay rises are held down to 1% per year. Rises beyond that represent an additional call on the new money. Following eight years of pay restraint for doctors, it seems logical to assume that at some point in the coming years, they could see some movement in their annual pay award.
Based on average salaries, the current pay bill for junior doctors, speciality doctors and consultants is £13.3bn. If a 2% pay increase is agreed, and the first 1%t of that is already built into existing NHS funding, an increase beyond this is not currently budgeted. A 2% increase will represent a cost pressure of £132.6m in year one (2018/19) and would rise to £135.3 by 2019/20, the first year of the new funding settlement, and in each subsequent year.