Trusts are acutely aware of their responsibility to deliver on the NHS' key performance targets within the funding envelope for the year. However, the operational pressures highlighted above mean trusts are carrying significant levels of financial risk. In this section we consider the financial task facing providers, including the deliverability of stretching efficiency targets, and what the implications of these financial constraints might mean for service provision.
Context
Over the course of the last financial year (2022/23), the NHS as a whole lived within its budget by a small margin. Overall, systems overspent against plan by over £534m in aggregate, with 16 systems (38%) finishing the 2022/23 financial year in a deficit position
(NHS England, 2023h). The financial planning process for 2023/24 was therefore always going to be challenging. NHS England (NHSE) has issued revenue allocations for both 2023/24 and 2024/25, holding total integrated care board (ICB) allocations “flat” in real terms (NHS England, 2023i), with additional funding available to enable capacity growth. In total, 14 systems are forecasting to finish the 2023/24 financial year in deficit – with an aggregated deficit of £650m.
Our survey results highlight the strength of feeling among trust leaders about the challenge of this year’s financial task.
"This is the most challenging financial planning round I’ve experienced in 37 years in the NHS." Mental health community trust
Last year, trusts and systems were asked to base their financial plans on a set of underlying assumptions, such as inflation remaining at near 2% and a significant reduction in Covid-19 related demand, which proved to be unrealistic. Trust leaders are concerned that similarly ambitious assumptions will be made in 2023/24.
What challenges are trusts facing in 2023/24 that are inhibiting their ability to deliver balanced financial plans?
Pay cost inflation: agency spend and rate cards
Trusts have relied on using temporary staffing to plug the gaps in their workforce, meet minimum staffing criteria, and ensure they do not compromise safety. NHS England has also introduced spending caps on the recruitment of agency staff to bring down agency spend to below 3.7% of the total NHS pay bill. However, trusts are concerned that the need to live within agency spending limits over 2023/24 could force them into making difficult decisions about service provision due to insufficient numbers of staff. Almost 8 in 10 trusts (78%) surveyed said it would be extremely difficult (37%) or difficult (41%) for their system to live within the agency spend limits for 2023/24.
A reduction in agency staffing is not guaranteed to lead to an overall reduction in pay costs over the coming year. The BMA has been encouraging substantively employed doctors to fully adopt their own rate cards for extra-contractual work, which are considerably higher than average payment rates. To preserve patient safety, many more trusts initially agreed to this on a mark-time basis for strike cover, but it has now set a precedent for overtime shift payments. This is likely to continue to cause additional financial pressure this year with no resolution of the junior doctors’ dispute in sight, and with consultants having confirmed strike action.
While the NHS Staff Council has now accepted a revised offer on Agenda for Change from the government. The Department of Health and Social Care has stated that frontline services will not be financially impacted by the increased pay offer. However, it is still unclear how this will be centrally funded.
The need for clarity is particularly strong among trust leaders from the community and mental health sectors. The cost base of providers from these sectors is different to the cost base of the acute sector because a higher proportion of their costs relate to pay costs. Due to the way in which pay award funding is distributed to providers, trusts from these sectors must often self-finance a proportion of the pay award, leaving them with a funding shortfall.
Non-pay cost inflation
With inflation (CPI) peaking at 11.1% in October last year, trusts have been grappling with increasing costs across a range of items, notably, energy, utilities and medicine costs. While the OBR predicts that inflation will fall sharply to 2.9% by the end of this calendar year, trust leaders remain concerned about the impact of inflation throughout 2023/24 (OBR, 2023).
As the Institute for Fiscal Studies forecasts, inflation may prove to be “sticky” throughout 2023/24 and remain stubbornly high (Nabarro, 2022). Exceptionally high prices have now been embedded into contracts for their entire duration, especially for energy costs. As trusts continue to be exposed to higher prices, they remain concerned that current national tariff uplifts are insufficient to cover the impact of inflationary cost increases. Indeed, over three quarters (76%) of trusts strongly disagreed or disagreed that inflation of energy and utilities costs has been accurately captured in their 2023/24 allocations.
Lack of funding for prevention
Trusts are increasingly aware of the value they can add as anchor institutions supporting better population health, of their role in systems to address the wider determinants of health and in supporting more preventative activity to keep people well. However tight financial envelopes across public services and severe cuts to local authority public health funding mean funds to invest in new and preventative approaches which could potentially deliver better outcomes and save funds down the line, can be challenging to deliver.
Disruption to elective activity
Historically, acute trusts have managed spikes in demand for non-elective care by reducing elective activity. However, this is no longer as viable an option because of the need to avoid causing further delays to treatment for those patients who have already faced long waits for care, and because recovering the elective backlog remains a political and national priority. In addition, the NHS payment system has reverted back to an activity-based payment model for elective activity. This means a proportion of trusts’ income this year is tied to their elective activity performance. Any spikes across the emergency care pathway – which impact the scale of planned elective care – will carry additional financial risk for trusts. In addition to the cost of cover for those striking, industrial action carries financial risk for trusts because of the loss of elective income when appointments are postponed and rescheduled.
Also, unlike the Elective Recovery Fund (ERF) for the acute sector, there is limited money available to fund activity growth for mental health and community trusts.
Efficiency
What is the efficiency challenge for 2023/24?
Trusts must identify cost-reducing 'efficiency' savings to live within their financial envelopes. The NHS is already committed to delivering £12bn of efficiency savings over the current spending review period. To achieve this target, trusts are set an annual efficiency factor baked into their allocations and asked to identify cost savings to bridge the gap between income and expenditure. The financial and operational pressures trusts are facing means that the efficiency savings they must deliver are significantly higher than in previous years.
89% of trust leaders responding to our survey believed that the scale of the efficiency ask this year is more challenging than last year.
On average, respondents said their organisation had delivered a 3% efficiency savings rate in 2022/23. However, on average, trusts said their estimated required efficiency savings rate for 2023/24 is 5.9%.
Why is the challenge harder than 2022/23?
Last year, on average, trusts under-delivered on their cost improvement programmes. Indeed, the National Audit Office (NAO) found that of the £1.6bn of efficiency savings planned by systems last year, over 60% of these were high or medium risk (NAO, 2023). The efficiency savings trusts achieved in 2022/23 were primarily non-recurrent (one-off) as trusts found it increasingly difficult to identify recurrent, cash-releasing efficiency savings.
There are two factors at play making the deliverability of efficiency targets more difficult this year. Firstly, as persistent inflation is embedded across a range of contracts, trusts are finding it increasingly difficult to cut costs. Secondly, some trusts have significantly less non-recurrent funding available to them in 2023/24. Some trusts relayed that the 2022/23 financial ask was only deliverable because of available cash balances which topped up their year-end financial positions.
To submit breakeven plans, trusts have signed up to very stretching cost improvement programmes. Trust leaders are concerned that the tougher efficiency challenge this year, combined with significant operational pressures, will make the financial task difficult to achieve.
"National and regional efficiency targets for 23/24 do not reflect the underlying capacity and operational challenge faced by providers of urgent and emergency care." Ambulance trust
Will we see services being scaled back?
In order to meet both the financial and performance asks this year, trusts are facing the very real prospect of having to make difficult decisions on either the type or volume of services they provide.
Reflections from our survey suggest that any scaling back of services would be a measure of last resort for trust leaders, and at this stage of the year, it is not something trusts are actively planning for. However, trust leaders shared their concerns about their capacity to meet the performance ask, protect quality of care, and deliver unprecedented efficiencies.
Trusts have acknowledged that should it become necessary to scale back the provision of some services, then they would reassess treatments with a lower clinical priority. Some trust leaders commented they would consider scaling back elective activity, even at the cost of missing out on critical in-year income as a result. However, the most likely area where potential cuts may fall will be longer-term transformational spending, including programmes and investment to prevent poor health.
Trusts are fully aware of the value of investing in prevention. However, given the scale of the operational and financial challenges they are facing, trusts are being forced to consider scaling back spending in areas with lower clinical priority to meet short-term demand pressures.
"There is a likelihood that all services will need to be scaled back to the minimum safety levels which is likely to impact on quality." Acute trust
Insufficient levels of capital funding to achieve key priorities in 2023/24
The majority of respondents identified insufficient capital funding to address the maintenance backlog, enable strategic transformation of their estates (including digital), deliver net zero ambitions and tackle care backlogs.
As we flagged in our recent report, No more sticking plasters, capital investment can transform the NHS through improvements to productivity and generating long-term efficiency savings (NHS Providers, 2023a). While there has been significant growth in NHS capital budgets over recent years, this followed a sustained period where access to capital was constrained. Inflation has also had a dramatic impact on the value of capital budgets, leaving trusts with less bandwidth to invest in their estate and forcing trusts to scale back or abandon some projects due to spiralling costs.
"We do not have enough capital allocation to deliver safety critical repairs to dilapidated building and very old equipment. Let alone digital transformation or invest-to-save capital investments." Acute trust
There is little doubt that the NHS estate is in dire need of significant capital investment. The maintenance backlog currently stands at £10.2bn in cash terms, and the total backlog has more than doubled since 2010/11 (NHS Digital, 2022b). Trusts are left with insufficient levels of operational capital funding to address critical safety risk and update antiquated equipment.