NHS slows financial deficit runaway train but are provider finances back on track?

25 August 2016

The much awaited quarter one finances for the NHS provider sector in England were published today, and they paint a pretty confusing picture.

The figures are seen by many as a litmus test of NHS Improvement’s stricter financial measures, such as control totals. And looked at objectively the headline figures seem to suggest the regulator has had success in slowing down the deficit. To be £461 million in deficit at the end of quarter one compared to £930m at the same point last year suggests progress is being made.

But, on the other hand, having a provider sector that is 461m in deficit – and £100m worse off than planned after only three months of the year – should be nothing to shout about. And many observers will recall that last year provider finances spiralled from the quarter one position to end up £2.45 billion in the red by the end of the year. 

So are trust finances, while by any standard not great, slowly inching towards turning around this year? Our latest survey of finance directors in 84 trusts, published to coincide with the quarter one figures, provides some clues.

First of all, the answer to the question of whether trusts are entering a more financially sustainable period is not a simple yes or no. To address this question we need to understand two key points, and then add some context.

The first key point is to understand why providers are so far in the red. The second is what actions central bodies in the NHS have taken to remedy the problem. And the context is to ask how trust finance directors are reacting.

On the first point, provider finances have been getting worse over the course of the past few years as a result of drastically reduced increases in funding -  0.9% per annum since 2010, compared to historic levels of about 4%. This has meant testing tariff efficiency factors. And while providers have become more efficient, they have slipped further and further into the red.

To remedy this, there have been changes in funding this year. For the first time in several years providers are seeing a rise in the money they get for the services they provide. Alongside a more sensible tariff, the central bodies have received an additional pot of money – a £1.8 billion sustainability fund – to give out to providers to try and address the deficit.  Along with some other one-off measures, these changes are designed to get the provider deficit down to minus £250 million by the end of this year.

To get access to the sustainability fund, the central bodies have said that providers need to demonstrate big efficiency savings each quarter. These are very stretching - over 5% of annual turnover in some cases. If trusts hit their financial targets in any given quarter they access a portion of the funding. But they have no guarantees that if they get back on course later in the year they will get any missed portions back.

This brings us to the context. Looking at our survey, nearly half of trusts asked were ahead of their target at the end of the first quarter, and another third were on target. But the surveyed finance directors had high levels of scepticism about whether they will be able to sustain their current levels of financial performance until the end of the year. Four in 10 were “not confident” about hitting their savings target for the end of the year, and a further 30% were unsure.

So, why the discrepancy?

Finance directors told us. The way the sustainability funding is structured creates an incentive for trusts to do everything to make sure their plans are on track in early quarters to get access to the sustainability funding.  The natural result of this is balancing savings over the course of the year in such a way that means the later quarters are likely to be more difficult.

In other words providers have been encouraged by the extra money in the system to deliver their best figures for the year as soon as possible. This is the reverse of what normally happens, when trusts are often off track before recovering their position as the end of the year approaches.

So what does this mean for today's figures?

It means “it’s better, but…”. The figures are definitely better and an improvement on the rapid decline we have seen in finances in recent quarters. Whatever the central bodies and providers have done, they have managed to slow the runaway train. Although another word of caution here: most finance directors we surveyed have little or no confidence that the measures recently introduced, such as control totals and financial special measures, will help the NHS to achieve financial sustainability this year.

And, unlike in previous years, what it really means is that it will be much later in the year before we actually know how the provider sector’s finances are shaping up. We will have to wait at least a few months more before we know whether the brakes applied to the train have really worked.

This blog was first published by the Health Service Journal. Ed tweets via @EdCornick.