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Introduction
There are approximately 225 NHS trusts and foundation trusts – the public providers of ambulance, community hospital and mental health services. In 2018/19, just under half (46 per cent) of these providers ended the year with financial deficits (ie, their expenditure was higher than their income).
Despite these deficits, the staff in these organisations were still paid, as were their suppliers of medicines, heating and medical equipment. In part, these obligations were met using financial assistance provided by the Department of Health and Social Care.
Prior to April 2020, several different types of financial assistance were available to NHS trusts and foundation trusts. But here we focus on the two that are most relevant to the debt write-off in April 2020: support in the normal course of business and interim financial support.
Support in the normal course of business. This financial assistance consists of long-term loans (generally up to 25 years), where there is a reasonable expectation that the loan will be repaid. This financial support is predominantly for capital investment in buildings and equipment.
Interim support. The Department for Health and Social Care can also provide financial support when additional investment is needed for the continued delivery of services. This support is predominantly for revenue spending on day-to-day needs, such as paying staff salaries or purchasing medicines.
The Department of Health and Social Care could provide financial assistance to a provider either as non-repayable public dividend capital (PDC) or an interest-bearing loan.
The financial support from a loan did not eliminate the financial deficits in NHS providers when they overspent their annual budget. This is because the loans were not treated as ‘income’.
To take a very simplified example: a trust that earns £100 million and spends £110 million in a year will end the year with a £10 million deficit. If the trust takes out a loan for £10 million from the Department of Health and Social Care it will not raise the trust’s income to £110 million that year, but the trust will have access to the cash it needs to meet its financial obligations.
What was the size of the NHS debt problem?
At the end of 2019/20, NHS providers held £13.4 billion of outstanding debt on loans taken out from the Department for Health and Social Care for ‘interim support’ (see Figure 1). At time of writing, figures were not available for how much debt was owed at the end of 2019/20 due to ‘normal course of business’ loans, but these debts totalled approximately £3 billion by the end of 2018/19.
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Debts due to interim support loans were widespread, with more than 100 of the approximately 225 NHS providers having historical debts at the end of 2019/20. In some cases, the level of loans was particularly high – two trusts alone held more than £1 billion of interim financing loans between them, while the liabilities from interim loans in some trusts were more than 80 per cent of their annual turnover (see Figure 2).
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Why did this debt build up?
In part, NHS providers built up cumulative debt because of wider issues facing the health and care system over the past decade. Rising demand for care and an unprecedented slowdown in NHS funding have meant that many NHS providers have overspent their annual budgets since 2013/14. Because of these reoccurring deficits, providers increasingly relied on financial support from national bodies.
However, the rising level of debt also reflected a change in how NHS finances were managed by the national bodies. Before 2014/15, the Department of Health and Social Care met most of the interim financing needs of NHS providers by giving these organisations cash in the form of non-repayable public dividend capital (PDC) (see Box below). Since 2014/15, interest-bearing loans have been the default form of interim financial support, and the value of loans and debt has increased substantially over subsequent years.
The government hoped that moving from PDC to a mainly loans-based scheme would increase financial discipline and reduce the likelihood of NHS providers overspending and incurring deficits. Instead, deficits in NHS providers have persisted and the amount of loans from the DHSC continued to increase.
Public dividend capital (PDC)
When NHS trusts were created in the 1990s, the government transferred ownership of land, buildings and equipment to them. The total value of these assets (over liabilities) can be considered the public’s equity stake in the new NHS trust and is called public dividend capital (PDC).
The government can issue new public dividend capital as a way of giving finance to NHS trusts, which in effect increases the public’s share of equity in the trust.
PDC does not count as debt in the same way as a loan does, but it does still come with its own financial conditions –- much like share capital in public companies, trusts pay a PDC ‘dividend’ to the Department of Health and Social Care.
This dividend is not a ‘repayment’ of debt to the Department (ie, it is not analogous to a loan being borrowed and then repaid). Instead the PDC dividend charge represents the notional cost of servicing debt and is intended to ensure the efficient management of surplus assets.
This dividend is calculated at a rate determined by HM Treasury – currently 3.5 per cent of the trust’s average net relevant assets. The Department of Health and Social Care and NHS England and NHS Improvement intend to carry out a review of the PDC dividend rate with the intention of making any changes in 2021/22.
NHS trusts may also repay PDC where they have surplus cash (eg, money from land sales that is not reinvested in new capital assets).
Sources: Hansard (2003), Audit Commission and HFMA (2010), NHS Improvement (2019), NHS England and Improvement (2020)
What were the problems with the NHS loans scheme?
Although the loans scheme helped NHS providers avoid cash-flow issues, the scheme was increasingly criticised in recent years for several reasons. Very few interim support loans have been repaid, which harmed the overall credibility of the NHS financial regime. The debt regime created uncertainty and increased transaction costs in the NHS, because administering and applying for these loans was a time-consuming business. The debt regime may have also created some unintended behaviours, eg, delaying payments to creditors including companies supplying clinical products, medical equipment and agency staff. Historical debt has also been cited as a key factor that has delayed or prevented planned mergers between NHS organisations.
How will the debt write-off work?
In April 2020, the government announced it would write off some NHS provider debts that existed at the end of 2019/20. This write-off only applied to debts due to interim support, which were frozen on 31 March 2020 when interest payments ceased. The principal on these loans and any outstanding interest will be extinguished from the balance sheets. This was accomplished by the affected NHS providers being issued PDC (see Box above) to repay the outstanding balance of their loans. In the future, interim financial support for NHS providers will be issued as PDC, rather than an interest-bearing loan.
The national bodies have said they will make related changes to the wider NHS financial regime because of the debt write-off. For example, where a provider might incur additional financing charges if they moved from holding a low-interest loan to an annual PDC charge.
Loans of around £3 billion that were issued as ‘normal course of business’ will remain and providers are expected to repay them. This is because these loans – which are often for planned capital investments in buildings and equipment – are generally regarded as affordable and are more likely to be repaid.
Conclusion
The NHS loans scheme was one of the most high-profile examples of using complex financial instruments to affect how NHS organisations operate. The scheme provided much needed financial assistance but was complex to administer and did not result in the provider sector meeting its financial targets or achieving financial balance.
The debt write-off is significant and will provide the affected NHS providers with greater financial certainty. But the write-off will not address the underlying issues that led to these debts. In a sustainable cash and wider financial regime, most NHS providers should be capable of meeting their financial obligations by generating income and using their own reserves, without relying on external sources of finance.
NHS England and NHS Improvement is planning further changes to the NHS revenue, capital and cash regimes, but unless these changes result in NHS providers being able to balance income and expenditure to a greater extent than they currently do, the reliance on interim financing from the Department of Health and Social Care – in the form of PDC rather than loans now – will continue to grow.