How many sticks will it take to beat the NHS into financial health?

The NHS ended the last financial year (2015/16) with an unprecedented deficit of £1.85 billion. During the year, national bodies implemented a series of drastic one-off measures to release resources. But, as the National Audit Office identified, many of these cannot be repeated. As the pressures grow across the NHS – as a result of increasing demand, constrained resources, and the impact of funding cuts to social care – it is clear that the system cannot cope.

For 2016/17, £1.8 billion has been made available in the form of a Sustainability and Transformation Fund. This is part of a plan – labelled a ‘reset’ – explicitly designed to stabilise NHS provider finances. The original aim for the Sustainability and Transformation Fund was to reduce the overall provider deficit to zero, though latest forecasts from NHS Improvement show a deficit of £644 million for 2016/17. And the funding comes with a number of strings; providers will only receive payments from the Sustainability and Transformation Fund when they meet a whole raft of finance and performance requirements. These new targets/requirements were set out in a recent consultation document on a ‘single oversight framework’.

When you want people to do something you can (in simple economics) either incentivise them to do it or penalise them for not doing it (although the demarcation between the two approaches isn’t always clear). In plain English it’s the carrot or the stick, with system leaders relying on the latter than the former. Our most recent survey of finance directors, part of our latest Quarterly Monitoring Report to be published shortly, shows that they are feeling the effects of that approach, but its impact on trust finances and performance is less clear.

This is what the survey results showed:

Even with the cash injection of £1.8 billion, 47 per cent of the NHS providers we surveyed expect to end the year in deficit. Although these numbers are high, it is important to recognise that this is an improvement on the figures at the same time last year – at which point 66 per cent were forecasting an end-of-year deficit. Furthermore, for 92 per cent of providers, their forecast end-of-year position is dependent on significant financial support, for example, from transformation funding, loans and reserves.

Financial control totals have been set for the vast majority of NHS providers in 2016/17, whether they are in deficit or surplus. Our survey shows that at this early stage, most (87 per cent) of providers are forecasting that they will meet their control totals. However, 40 per cent were fairly or very concerned about whether they will be able to deliver on this, suggesting that they think the position is likely to deteriorate as the year goes on. And even some of those who were fairly confident about achieving their control totals expressed less optimism in their comments:

'Activity pressures are considerable, which is challenging our ability to deliver the control total.'

'Already, I fear we might miss our 2016/17 plan by up to £3-4 million (downside). The bottom line number, of course, depends on the extent to which the Department of Health / NHS Improvement encourage another round of technical adjustments including capital to revenue, etc.'

'We have some risks, and I’m concerned that Sustainability and Transformation Fund metrics do not include mental health, therefore are heavily weighted on financial performance, with the potential of a 'double whammy'.'

One way for providers to drive down deficits is to reduce spending on staff. More than 70 per cent of trusts we surveyed expected to reduce their use of agency staff. A smaller number (22 per cent) also expect to reduce their permanent clinical headcount. Among community and mental health trusts, this figure rises to 40 per cent which is surprising – and worrying – given that the community and mental health sectors ended 2015/16 in net surplus and have longstanding goals to improve services.

As I continue to work on our Quarterly Monitoring Report it strikes me we may be reaching a tipping point. When asked for their views about the overall financial state of their wider local health and care economy over the next 12 months, 88 per cent of trust finance directors and CCG finance leads are fairly or very pessimistic. One response from a finance director puts it in quite clear terms:

'I have chosen ‘fairly pessimistic’ because I need to leave some room for the inevitable deterioration in the subsequent 12 months!'

Gone are the days when it could be claimed that deficits were the result of poor financial management amongst a few rogue organisations; this is a system-wide problem. In these circumstances, the use of sticks to beat the system into financial ‘health’ is – at best – of limited value. As NHS leaders continue to juggle the twin challenges of finances and performance, they are now having to face very real and difficult decisions about patient care.

As we have set out in previous reports, there are still productivity gains to be made, but the sheer scale of savings now required cannot be generated by productivity improvements alone in the time available. It is time for an honest debate about what the health service can offer with the funding made available to it.