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NHS finances on the brink

Richard Murray gives an overview of the state of NHS finances, ahead of the latest figures being released next week.


Is the spectre of an NHS – and Department of Health – overspend once again haunting the corridors of power?

It was not supposed to. Back in December 2015, NHS Planning Guidance established two firewalls to prevent this. The first was the £1.8 billion Sustainability and Transformation Fund (STF), which aimed to reduce the net NHS provider deficit to zero. The second was a 1 per cent topslice of NHS commissioner budgets, which created an £800 million contingency to be used to mop up any remaining overspends. Concern back then was less about 2016/17 and more about the years to follow when the growth in NHS spending was (and still is) expected to flatline.

However, both firewalls are looking shaky. On the provider side, the target net deficit has drifted up over the year, from £250 million at the time of the NHS financial reset to £580 million. We will find out the position at the end of Quarter 3 when NHS Improvement publishes its latest update next week, but their chief executive, Jim Mackey, has already confirmed that the £580 million target will not be met.

As bad as next week’s news may be, it may not tell the full story. It now matters exactly how much the forecast deficit has risen and how robust these forecasts are in the face of a very difficult January and February. The responses to our latest survey of NHS finance directors (carried out in late January and early February) make uncomfortable reading. They suggests that the forecast net deficit has risen by about 30 per cent since the autumn, when NHS Improvement’s Quarter 2 report showed a net deficit for the year of £669 million. Simply applying one number to the other would give a 2016/17 net provider deficit somewhere between the £820 million to £920 million mark.

Could the provider sector recover some ground at the end of the year? As the NHS struggles with its worst winter performance in over a decade, this is a big ask. Some trusts struggling to meet rising demand in A&E may well have been forced to draw on additional bank and agency staff. Others, in an attempt to hold down elective waiting lists, have outsourced work to the independent sector, a trend also picked up by the Financial Times. Spending on outsourcing was already forecast to rise from £241 million in 2015/16 to £349 million this year and may now drift higher. Acute providers are caught between a rock and a hard place: spend extra money on staff or on outsourcing, or sit back and watch A&E and 18-weeks waits get longer.

There is a risk that the rising provider deficit could overwhelm the second firewall: NHS Commissioners’ £800 million contingency. But is this contingency intact anyway? NHS England’s Quarter 3 financial update spoke of ‘up to an £800 million managed underspend’, which is very different from ‘at least an’ £800 million underspend. Caution in NHS England may be well placed. After all, clinical commissioning groups’ (CCGs) financial performance has deteriorated sharply, hitting a £437 million overspend in the first nine months of the year. Just like NHS providers, CCGs are forecasting that they will cut their overspend by the end of the year, but the same difficult winter may make this hard to achieve. However, it’s cheering to remember that commissioner underspends do have a habit of (unexpectedly) rising at the very end of the year, and perhaps history will repeat itself.

To be clear, any improvements in financial performance in NHS providers must not come at the expense of NHS commissioners, and vice versa. These just move deficits (or surpluses) from one side of the line to the other and do not help the net position.

There may be one last firewall back in the Department of Health itself. After all, the Department managed to absorb the considerably larger NHS provider deficit of 2015/16 (strictly speaking the Department did marginally overspend, but managed through a fortuitous oversight to avoid suffering the full constitutional consequences). As no-one thinks the net NHS deficit will be as big as last year’s, can the Department of Health once again come to the rescue? Don’t be too sure: the £1.8 billion STF came from them in the first place, thereby handing the NHS its deficit funding up front. If there is a remaining pile of cash sitting in the Department of Health it is likely to be a small one.

Which leaves us with the Chancellor, Philip Hammond. Unfortunately, the last HM Treasury supplementary estimate of the financial year (their last chance to re-set spending totals) was issued on 9 February. Even if the Chancellor wanted to pull the Department out of trouble (which is unlikely), any nasty surprises in NHS finances now may have simply come too late.

So once again everyone is watching the latest numbers coming out of the NHS, adding up the estimates and trying to balance the risks. It may seem surprising that we have ended up here given the combination of the STF, the £800 million and the undoubted efforts made right across the NHS to pull the deficits down and maintain performance. But perhaps it is not so surprising when we set all these efforts against the continued headwinds of rising demand across the service, rises in delayed transfers of care, staff shortages, and that we are now in the seventh year of the longest sustained spending slowdown in NHS history.

What happens if the Department of Health does indeed spend more money than our MPs voted for? Charles I tried something similar and the outcome (figuratively speaking) is likely to be the same: heads will roll.