The new approach to NHS finances in 2016/17

After the £2.45 billion overspend by NHS providers in 2015/16, NHS Improvement and the other national bodies have introduced a new approach to managing NHS provider finances. This approach has a number of key elements.

The Sustainability and Transformation Fund

Additional funding of £1.8 billion has been placed in the new Sustainability and Transformation Fund and is being allocated to trusts to help them manage deficits. This money will be paid out to NHS providers (overwhelmingly to acute providers), but only where they meet a set of finance and performance targets. Sustainability and Transformation Fund payments reduce an organisation’s reported deficit. It was hoped that the £1.8 billion Sustainability and Transformation Fund would be sufficient to return the NHS provider sector as a whole to net balance. But this looks unlikely; NHS Improvement has already set a revised target of a £250 million deficit for the sector.

Control totals

Control totals are the financial targets for each organisation – they set the maximum deficit (or minimum surplus) an organisation is allowed to run. Each organisation has its own control total, which is agreed with NHS Improvement depending on the financial strength of the organisation. Twenty-four NHS providers have not yet agreed control totals. Once Sustainability and Transformation Fund payments are included, the combined control totals for all trusts should have added up to net balance for the provider sector.

Meeting finance and performance targets

If providers fail to meet the finance and performance requirements that underpin their control totals, access to the Sustainability and Transformation Fund will be withheld. In the first quarter of 2016/17, 29 providers failed to meet these requirements and had Sustainability and Transformation Fund funding withheld. While this will increase deficits reported by individual providers, it will not alter the net provider position as the Sustainability and Transformation Fund will be underspent by the equivalent amount and NHS Improvement counts this underspend against providers as a whole. If a provider cannot pay its bills – such as salaries for its staff – without Sustainability and Transformation Fund support it may need to turn instead to the Department of Health for additional financial support.

Latest forecasts

Without further action, NHS Improvement currently forecasts a full-year net provider deficit of £644 million for 2016/17 but is aiming to reduce this to a net £250 million deficit.

How is the NHS performing?

  • 2016/17 is a critical year for NHS finances. With NHS provider deficits hitting £2.45 billion in 2015/16, the £1.8 billion Sustainability and Transformation Fund has been established with the initial objective of reducing the net provider overspend to zero this year. The evidence from our latest survey of finance directors gives an indication of progress against this objective and the implications for future years.

  • For NHS providers, this additional £1.8 billion and the measures taken by the national bodies to tackle overspending does appear to have reduced the overall net deficit, with existing plans for the year forecasting a £644 million overspend (NHS Improvement 2016). However, alongside failing to reach net financial balance overall, nearly half (47 per cent) of providers in our survey are still forecasting deficits. This will leave trusts in many parts of the country entering 2017/18 with an underlying deficit. Perhaps more worryingly, 40 per cent of NHS providers are concerned or very concerned that they will not hit their financial targets in 2016/17, creating a risk that deficits will increase over the year.

  • While in 2015/16 NHS commissioners underspent their budget by £670 million (Department of Health 2016), this year our survey shows that clinical commissioning groups (CCGs) are facing far greater challenges in balancing their books. Compared to the same time last year, the proportion forecasting a deficit or break-even has risen from 24 to 43 per cent. CCGs’ pessimism over their targets for making savings this year is even greater, with the proportion stating they are concerned or very concerned over their savings targets rising from under 30 to more than 60 per cent since the same time last year. Just as with NHS providers, this creates a risk that CCGs’ finances will deteriorate as the year progresses.

CCG Leads
Figure 1: How confident are you of achieving your QIPP target?

Respondent comments

  • “Although a lot will be achieved, there are real issues in timescale to deliver QIPP with going through consultation and current open-ended PbR [Payment by Results] contracts make it very difficult unless real demand management can be achieved.”

  • “QIPP reporting at month 3, based on activity/milestones reporting for two months of the year, shows QIPP delivery at 59 per cent of plan (in 2015/16 QIPP delivery was c85 per cent of plan).”

  • “Areas of expenditure highlighted for QIPP schemes are significantly over plan year-to-date, therefore, delivering actual savings in-year will be very difficult.”

  • “I think we will do well to achieve half of our QIPP target. Most QIPP schemes depend entirely on changing clinical behaviours and we do not have direct control or sufficient financial leverage over primary care to deliver that...”

40 CCG finance leads answered this question for the 44 CCGs they cover collectively; CCGs only surveyed since their establishment in April 2013.

Financial prospects for 2016/17

  • National bodies have responded to the financial crisis in the NHS by introducing an increasing range of financial and operational controls over local NHS organisations. This has meant that access to central support via the Sustainability and Transformation Fund comes with strings attached on finance and performance, with spending on agency staff and infrastructure (capital) being two notable targets.

  • For providers, the introduction of the Sustainability and Transformation Fund and other measures has led to a reduction in the size of the net deficit and in the number of organisations actually in deficit, when compared to last year. However, the scale of the financial challenge was such that half of the organisations receiving Sustainability and Transformation Fund support are still in deficit, and 47 per cent of all providers (whether or not they are receiving Sustainability and Transformation Fund support) are still forecasting an overspend. For these organisations, the Sustainability and Transformation Fund may have reduced the size of their deficit, but it has not been sufficient to remove it entirely. This has left many providers still relying on reserves, other financial support from the Department of Health and on savings made by cutting capital spending programmes. With latest plans still forecasting a net £644 million deficit, clearly these measures have not yet been sufficient to return many NHS providers to financial good health.

  • Control totals have been set for all NHS providers in 2016/17. These set out the financial targets for each organisation and are applied whether trusts are in deficit or surplus. Our survey shows that at this early stage of the financial year, most providers (87 per cent) still expect to deliver their control totals. However, 40 per cent were fairly or very concerned that they would ultimately fail to do so; this raises the risk that the provider position may deteriorate as the year goes on.

  • Controls on the use of expensive agency staff are a further key building block of the drive to reduce deficits. Our survey confirms widespread action to reduce agency bills, with more than 70 per cent of organisations expecting to reduce their use of agency staff. This is a common objective across the acute, community and mental health sectors. Nearly a quarter (22 per cent) are also looking to reduce their permanent clinical workforce headcount, 14 per cent of acute sector providers, rising to nearly 40 per cent of community and mental health providers. Plans to reduce the workforce in community and mental health settings seem surprising given these sectors ended 2015/16 in net surplus and with increasing evidence of problems with quality of care and access.

  • More than half of our survey respondents (both trusts and CCGs) think patient care has deteriorated over the past 12 months with delayed transfers of care (for trusts) and the four-hour A&E target (for CCGs) topping the list of concerns. Both concerns are understandable: the number of days lost to delayed transfers of care has risen by 23 per cent since June last year. On A&E waiting times, in quarter 1 2016/17 the proportion of patients waiting more than four hours from arrival to discharge, admission or transfer in all A&E departments was 9.7 per cent. In June alone this had scarcely improved to 9.5 per cent, the worst performance in A&E at this time of year since 2003/4. Alongside A&E, the NHS missed its performance standards for the 18-week referral-to-treatment target, waiting times for diagnostics and ambulances and for the 62-day cancer waiting times target.

  • Problems in A&E and elsewhere are examples of the wider challenge facing the NHS: how to maintain performance while also reducing deficits. This means many organisations are running increasingly `hot’, trying to treat more patients with the same (or less) capacity. In general and acute and mental health hospitals, the percentage of overnight beds occupied by patients is over the 90 per cent mark, well above levels seen in previous years and likely to be a key contributor to delays in admitting patients from A&E. Yet as demand continues to rise with year-to-date increases to June of 3.6 per cent in non-elective admissions and 3.2 per cent in GP referrals, this balancing act between finance and performance is getting more difficult.

NHS TrustsCCG Leads
Figure 2: Percentage of beds occupied in general and acute, and mental health hospitals, quarter 1, 2011/12 to 2016/17

Data source: Bed availability and occupancy, quarter ending June 2016

Beyond 2016/17

  • Following the Brexit referendum, the government has set aside the targets for public borrowing that underpinned last year’s Spending Review. With likely changes to the forecasts for economic growth and for inflation, the Autumn Statement will set out the government’s new plans for the rest of this parliament. In advance of that, our survey shows finance directors in trusts and CCGs share the same deeply pessimistic view of the future, with 64 per cent of trusts and 55 per cent of CCGs fairly or very worried about achieving financial balance in 2017/18. Looking further ahead, 77 per cent of trusts and 70 per cent of CCGs think there is a high or very high risk the NHS will not deliver the efficiency savings needed to deliver the NHS five year forward view (Forward View).