The changing shape of NHS finances

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Part of Quarterly monitoring report (QMR)

The Prime Minister’s announcement of a multi-year funding offer from April 2019 has understandably taken up most of the oxygen in the room recently when it comes to NHS funding and finance. But we still have the 2018/19 financial year to get through before this funding kicks in. It was originally hoped that the NHS provider sector would be financially balanced this year, but four months into 2018/19, and it is still unclear what level of financial deficits the NHS provider sector is actually planning for. Our recent quarterly monitoring report (QMR) survey of NHS trust finance directors suggests the NHS still has a difficult year ahead. 

As austerity and widespread staffing shortages began to bite over the past decade, the finances of NHS providers often took a familiar shape each year – a few providers made a large surplus, a few made a large deficit, and most organisations hovered around the ‘breakeven’ middle. But more recently this pattern of financial performance has been increasingly pulled out of shape and distorted. 

The proportion of trusts in deficit grew from 5 per cent in 2010/11 to 44 per cent in 2017/18, with acute hospitals accounting for just under 90 per cent of all providers in deficit. Our latest QMR suggests 2018/19 will be another difficult year with 42 per cent of finance directors expecting their organisations to be in deficit – a similar proportion to 2017/18 when the sector overspent by nearly £1 billion. 

But as importantly, when you look across the years the shape of the sector’s financial performance has become squatter and wider. In practical terms this means that not only are fewer trusts breaking even, but the financial position of individual NHS organisations is increasingly variable, as some trusts posted substantial surpluses of more than £70 million in 2017/18 while others posted deficits of more than £100 million (Figure 1). 

Source: The King’s Fund analysis of NHS Improvement data, 2014/15 and 2017/18

So, why is the financial performance of individual organisations so volatile? The answer lies, at least in part, with the Sustainability and Transformation Fund – a £1.8 billion pot of money that is centrally administered by NHS England and NHS Improvement, and given to individual NHS frontline organisations if they achieved ambitious financial targets (or ‘control totals’). In 2016/17 and 2017/18 some trusts missed their financial targets and spiralled further into deficit, and other trusts achieved their targets and saw their surpluses bolstered – the National Audit Office found 40 per cent of sustainability and transformation funding in 2016/17 was used to create or increase surpluses in trusts. 

In some cases then, the rich trusts get richer, and the poor get poorer. Now that would be fine if you believe two things. First, that the performance of individual organisations is less important than the overall position of the provider sector, ie, a few trusts can continue to lose £100 million a year if the overall sector of more than 230 organisations returns to balance. Second, that by rewarding trusts that achieve their targets you are rewarding the right behaviours, and this will act as a spur to other trusts to try even harder to achieve better financial performance. 

I don’t believe either of those things. Without doubt there are trusts that, through graft, discipline and innovation, have met their financial targets. But I have spoken to many finance directors who said they were lucky to achieve their target by having an asset or plot of land to sell at the right time, or an income windfall they had not planned for. These are enough to get a trust through the year, but they are unlikely to be repeatable and are not a sustainable strategy for managing NHS finances. Meeting the Prime Minister’s recently announced wish that ‘over the medium term no NHS organisation is in financial deficit’ will surely require a change to the overall financial strategy of recent years. 

Let’s not kid ourselves. Before the Sustainability and Transformation Fund came into existence, the financial fortunes of individual organisations could still be unpredictable. End-of-year financial positions depended on sudden influxes of ‘winter funding’, income from cryptically named schemes like Project Diamond, and the late delivery (or not) of cost saving schemes in the final month of the financial year. But if the release of centrally held sustainability funds was meant to dampen down some of this volatility it seems to have had the opposite effect. 

The current financial regime has also made local organisations more dependent on ‘the centre’ for financing support to remain solvent. In our latest QMR 63 per cent of finance directors felt their 2018/19 position now depended on the provider sustainability funding (the 2018/19 successor to sustainability and transformation funding for the provider sector) or loans from the Department of Health and Social Care. A far cry from the days of quasi-autonomous NHS organisations that were in control of their own financial destiny. 

In recent years, layer upon layer of financial controls have been developed to get a better grip on NHS finances. This has made the financial management regime ever more cluttered and complex – a situation described as a ‘Frankenstein mishmash of financial management rules’ by one finance director. Provider sustainability funds, provider control totals, system control totals, section 42A loans, public dividend capital, marginal tariff rates, financial special measures, financial improvement programmes, and capped expenditure processes all take (or lose) their place in the financial landscape. All vie for the limited time and attention of finance directors. 

Ian Dalton, Chief Executive of NHS Improvement, has said there will be a ‘new financial architecture’ in place from 2019. It can only be hoped that NHS financial management will become fairer, simpler and more effective.  

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