Designing a new financial regime for the provider sector

Patrick Garratt profile picture

13 January 2021

Patrick Garratt
Senior Policy Officer


The way in which money flows to and across secondary care and health systems is set to change markedly in the next financial year. Reforms currently being proposed have major implications for how decisions about money are made, and how funding is distributed across the NHS.

As with any rapid, far-reaching change, the substance and timing of the proposals present opportunities and significant risks. These policy changes are being developed at the same time that operational pressures caused by COVID-19 have reached unprecedented levels.

What is changing?

NHS England and NHS Improvement are introducing major reforms in two broad areas: giving systems an increasingly central role in managing finances; and moving away from the tariff by locally determining the price of services.

Changes to the NHS financial regime were underway before the start of the COVID-19 pandemic. The long term plan already committed to new forms of contracting designed to enable collaboration and focus on new models of care. And a new approach to capital funding was also introduced in 2020/21, establishing capital spending limits for systems for the first time.

However the old financial system was decisively torn up at the beginning of 2020/21 when NHS England and NHS Improvement introduced a set of temporary arrangements which suspended the established financial system to enable the NHS to focus on responding to the COVID-19 pandemic.

In the second half of this financial year, systems began to play a more significant role in managing NHS finances.

Patrick Garratt    Senior Policy Officer

This break with the past has enabled NHS England and NHS Improvement to accelerate its planned shift towards system working. In the second half of this financial year, systems began to play a more significant role in managing NHS finances through being given revenue funding envelopes, and responsibility for how COVID-19 top-up funds were distributed.


System finances

The aim has been to develop collective system ownership of financial allocations. However, the shift has been so fast and far-reaching that the degree to which the new financial regime is equitable and effective may ultimately depend on the maturity of the relationships between partners in health and care systems.

Integrated care systems (ICSs) began at different starting points and have not all developed at the same pace, scale or structures. Taking complex decisions concerning the distribution of funding and ensuring that allocations are spent appropriately will be new responsibilities for most systems.

The tried and tested governance arrangements that exist in statutory bodies like trusts and clinical commissioning groups (CCGs) to ensure robust decision making and good stewardship of public funds will not exist in most systems yet. In ICSs that are less advanced, this risks complex and protracted rounds of negotiation, and decisions made on the basis of local dynamics and relationships, rather than clear principles and processes.

Some systems may not yet have developed a good enough collective knowledge of how all local services are run or funded.

Patrick Garratt    Senior Policy Officer

In addition, some systems may not yet have developed a good enough collective knowledge of how all local services are run or funded. Where, for example, the needs of mental health or community services are not properly understood by the system as a whole, the case for investment in those services may not be given adequate attention. Likewise, financial problems related to structural issues, for example geographic factors including rurality, may not be fully understood by all members of an ICS.

New contractual forms

The move towards collective, system-wide ownership of local finances is also reflected in NHS England and NHS Improvement's plans to reinvent the contracting arrangements which underpin funding flows across the NHS.

As the pandemic began, the system of contracting between providers and commissioners, and the use of national "tariff" prices was suspended, and all providers were placed on 'block contracts' (where providers are paid a fixed sum based on their running costs). Next financial year, this approach will evolve into a blended payment system for almost all secondary care services.

Basing contract values on providers' costs, rather than national tariff prices, will be a major departure, particularly for acute trusts whose income had been based on the levels of activity they undertake.

Patrick Garratt    Senior Policy Officer

Basing contract values on providers' costs, rather than national tariff prices, will be a major departure, particularly for acute trusts whose income had been based on the levels of activity they undertake. The intention is for locally agreed contracts to reflect the unique costs of healthcare delivery for each provider. This will help trusts account for legitimate variations such as facilities costs, workforce constraints and geographical limitations.

However, it is not yet clear how good financial performance can be rewarded – or who carries the can if things go wrong. Trusts therefore need clarity over how the financial framework will align with the regulatory regime to define and reward good performance, as well as supporting those in deficit to return to a sustainable financial path.

It is also important to explore precisely how effective financial incentives actually are in improving operational performance, and what non-financial incentives can also be used at both the system and organisational level.

Making sure the financial framework works for all trusts

Providers are positive about the opportunity to improve health outcomes via system working, and the allocation and distribution of funding at ICS level can support these aims. However, moving fast means care must be taken and risks identified. In our briefing, we have set out our 'asks' for the new financial framework.

Given that there are different levels of ICS maturity – as we highlighted in our recent submission to NHS England and NHS Improvement's Integrating Care submission – there must be clear operating parameters to support trusts to adapt to the changes. More mature systems should be allowed develop their own financial governance arrangements.

NHS England and NHS Improvement should ensure decisions over revenue and capital allocations are transparent.

Patrick Garratt    Senior Policy Officer

NHS England and NHS Improvement should ensure decisions over revenue and capital allocations are transparent, that the role of financial incentives are clarified, and that the new regime works for providers of all type across acute, ambulance, community and mental health sectors.

Limited NHS headroom to engage means it is also important for timelines to be kept under review. It is also unclear how viable a 'normal' planning round may be in the current circumstances, nor how smooth the transition will be from a period of interim financial arrangements to the new regime.

NHS Providers will continue to engage with members and NHS England and NHS Improvement about the operational impact system funding, with a focus on setting a realistic pace of change that reflects ongoing operational pressures and uncertainty about the impact of COVID-19 in the months ahead.

This blog was first published by Public Finance.

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Patrick Garratt
Senior Policy Officer

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