The recent, belated publication of the 2019/20 NHS accounts shows that, going into COVID-19, providers' finances were stretched and deteriorating – despite a significantly improved funding settlement linked to the NHS Long Term Plan (LTP). When the pandemic is behind us, questions about the long term investment required for the NHS will remain.
A growing provider deficit
NHS England and NHS Improvement's main annual reports focus on the number of providers in deficit falling from 107 in 2018/19 to 53 in 2019/20. This is in line with the ambitions of the LTP and represents success on the year's key financial target.
However, delving deeper into the detail reveals that the total provider deficit has risen by nearly £80m, from around £830m in 2018/19 (excluding a favourable technical adjustment following the collapse of Carillion) to £910m in 2019/20. This is despite a 3.6% real-terms increase to the overall NHS budget – the biggest uplift for 10 years.
While that additional funding has improved the position of many providers, there is a core group for which a rapid reversal of fortunes is unrealistic.
While that additional funding has improved the position of many providers, there is a core group for which a rapid reversal of fortunes is unrealistic. If NHS England NHS Improvement is to achieve its goal of all providers returning to financial balance by 2023/24, these organisations will need targeted support to address the structural issues that often drive their deficits – for example, local variations in facilities costs and workforce constraints.
Ultimately, a mismatch between costs and income lies at the root of the provider deficit. The NHS budget has not risen fast enough to meet the rapidly growing demands presented by an ageing population, more complex long term conditions and technological advancement. A legacy of underinvestment also makes it difficult to unlock efficiencies, which can push providers further into the red.
NHS England and NHS Improvement was only able to balance the books at a national level in 2019/20 by using underspends in its central budget (including direct commissioning and specialised commissioning) to offset the provider deficit. This is not a sign of a sustainable health system.
Key decisions favouring the acute sector
The sector breakdown also tells an interesting story. While the acute sector is still in deficit, its position has improved year-on-year. In contrast, the positions of the mental health, ambulance, specialist and community sectors have all declined (their surpluses have reduced).
There are a few things that might help explain this. One is the shift from the Provider Sustainability Fund (PSF) to the Financial Recovery Fund (FRF). The PSF could be accessed by providers planning a surplus, breakeven or deficit, as long as they hit their financial targets. In contrast, the FRF can only be accessed by providers in deficit. Most providers in deficit are acute so, when the FRF was created in 2019/20, a greater proportion of central sustainability funding was available exclusively to the acute sector.
Another possible explanation is the one-off transfer of £1bn from the PSF into urgent and emergency care. Again, this represents a diversion of money, which had previously been available to all providers, into the acute sector.
It is vital that every part of the provider sector continues to receive adequate funding for the pressures they face.
It is vital that every part of the provider sector continues to receive adequate funding for the pressures they face. COVID-19 has highlighted the importance of getting the balance right. Mental health services are reporting significant additional demand, which is likely to continue for some time, and community services are already supporting 15% more people than they were at the same point last year.
Capital investment not keeping up with demand
Everyday provider capital spending rose by £0.5bn in 2019/20. This is extremely welcome and largely accounted for by a mid-year increase in the Department of Health and Social Care's (DHSC's) capital budget.
At the same time, the cost of the capital maintenance backlog grew to £9.0bn, up 40% on 2018/19. COVID-19 has exposed the challenges created by an outdated estate, such as some hospitals struggling to maintain adequate flows of oxygen, and difficultly rapidly expanding or repurposing inflexible old facilities to deal with large numbers of critically ill patients.
The rising sector cash balance – £6.8bn in 2019/20 – indicates that even providers in surplus faced difficulties reinvesting in their facilities.
The rising sector cash balance – £6.8bn in 2019/20 – indicates that even providers in surplus faced difficulties reinvesting in their facilities. In particular, they are constrained by the DHSC's strict national capital spending limit, which does not leave enough headroom for providers to make full use of their reserves.
The simple truth is that there are too many providers with inadequate buildings and failing equipment, unable to adopt new technologies to improve care. These issues will not be rectified without sustained increases in the capital budget and a capital allocation system that is fit-for-purpose.
Looking to the future
The 2019/20 NHS accounts show that the provider sector was in a precarious financial position before COVID-19 took off. In the short term, the government has committed to giving the NHS "whatever it needs" to manage the impact of the pandemic. Beyond this, the path back to financial sustainability will need to consider not only the lasting effects of COVID-19 – such as increased demand for care and lost efficiency gains – but also underlying, long term challenges that have not gone away.
This blog was first published by Public Finance.