Introduction

Over the past two years, we've seen a fundamental shift in how provider finances have been managed at the national level.

In 2015/16, the provider sector ended with a record £2.45bn deficit and 157 providers (just under 70% of the sector) were in deficit. A measure of financial health – EBITDA (EBITDA means earnings before interest, tax, depreciation and amoritisation), which is effectively income minus current operating costs – was 1.6%, well below the 5% Monitor used as a guide to test whether an NHS trust was financially strong enough to be licensed as a foundation trust. In effect, the financial survival of the NHS provider sector was in question and provider deficits were in free fall.

In response to this rapid deterioration in provider finances, at both the aggregate and institutional level, a new financial framework was introduced in an attempt to reduce provider deficits and support a return to greater financial discipline over the sector. Each provider, irrespective of their financial position, was asked to sign up to a control total – a financial target – setting a minimum surplus or maximum deficit they had to meet.

This was an approach many NHS trusts, overseen by the Trust Development Authority, would have been used to but was new territory for many well performing foundation trusts, which had traditionally been free to set a surplus, breakeven or deficit position. Although provider finances had already started to come under greater scrutiny in previous years, the universality of the approach was a new development.

In exchange for meeting financial control totals and performance improvements, providers would each receive their share of a new £1.8bn in sustainability and transformation funding (STF). Making this sustainability funding contingent on hitting financial and performance targets was seen by the Treasury, the Department of Health and the national bodies as means of ensuring the investment they were making in the provider sector in 2016/17 delivered genuine financial improvement.

This framework was introduced as a short-term, temporary approach to support the sector back to a sustainable financial footing. On paper, it has had some notable successes. As a result of a substantial amount of hard work across the NHS, the provider sector deficit was reduced to £791m this year, a £1.7bn improvement since 2015/16.

However, the administration of the system has had many challenges and it has exercised provider boards up and down the country. As we enter the second half of 2017/18, early work is now required to identify what a future financial framework looks like for 2019/20. It is clear that the current arrangements cannot continue in perpetuity, not least because the STF has not yet been confirmed in 2019/20, but also because the sector now needs the opportunity to earn back its autonomy based on the improvements they have made to date.

Even the chief executive of NHS Improvement, at NHS Confederation's conference in 2017, recognised that “none of us should think that this is sustainable for ever... I want to see more movement in this next phase back to earned autonomy to get local systems into a place where they have a better chance to build their own agendas.”

In this briefing, we look at future options, setting out provider perspectives on how the STF and control totals have operated to date and considerations for how the regime should develop in future. We build on trust feedback from:

• The results of a new survey, conducted in July 2017, which received responses from 109 trusts, 47% of the sector. This builds on earlier surveys we carried out in August 2016 and February 2017.
• An NHS Providers roundtable on control totals and STF in August 2017, with 25 members of the provider sector, NHS Improvement chief executive Jim Mackey and finance director Elizabeth O’Mahony.

Key features of the current financial framework – control totals and STF

Providers are not required to sign up to control totals but failure to do so forfeits access to a share of the £1.8bn and other financial incentives. Although the vast majority of providers have tended to sign up to a control total – 97% did last year, and 88% had by quarter 1 this year – there are very legitimate reasons why some boards are unable to. Trusts often cite the level of savings being asked of them as a key reason for not signing up – for example, those that had not yet signed up to a control total by March 2017 were asked to deliver a 6.4% average cost improvement plan (CIP), well above what the evidence suggest it is realistic to achieve. In our latest survey, one trust highlighted that the gap between their plan and the control total requirement was £100m. Although failure to sign up means a provider loses access to their share of £1.8bn, as well as other financial benefits such as a suspension of contractual fines, the scale of the ask required might still mean it makes more financial sense to opt out.

If a provider does not meet their financial control total and performance trajectory on a quarterly basis, they do not receive their full STF allocation

In the first year of operation (2016/17), 217/228 trusts accepting a control total benefited from the £1.8bn STF. Not all providers would have received their full amount, as performance is assessed on a quarterly basis, but it does mean the majority of the sector received a share of the £1.8bn. Helpfully, an element of judgment is also made when deciding whether providers have met their financial and performance targets, rather than a strict pass/fail application.

The STF payment is a direct payment to providers from NHS Improvement

This created a significant income stream for providers, separate to the national tariff and commissioner/provider contracts. Where direct allocations were traditionally routed through commissioners (such as recent winter resilience funding), the explicit transaction between NHS Improvement and providers demonstrates the level of national oversight exercised over the process and payment.

The £1.8bn STF was used to support the national balance sheet. The STF was not allocated to the provider sector with the aim of increasing expenditure, but instead was targeted with the specific aim of improving the bottom line. This means that gross surplus positions had to be used to offset the gross deficit run up by other providers. According to analysis from the Nuffield Trust, this means that £715m of the £1.8bn allocated in 2016/17 “now sits as unspent surplus in provider bank accounts”. While the funding can't be spent on revenue in 2017/18 as it would run the risk of breaching current control totals, there are opportunities for trusts to use their surplus to support capital investment programmes.

All but £4m of the £1.8bn remained within the provider sector in 2016/17. £480m of the £1.8bn was unallocated from providers not signing up to a control total or from those missing financial and performance targets. This led to the introduction of a ‘pound for pound’ incentive payment for those who exceeded their control total and an additional year-end bonus to those that delivered or exceeded their control total. At the end of 2016/17, 177 providers were awarded £186m in incentive payments and £294m as a revenue bonus. This left a residual £4m of the STF fund, which was returned to the Department of Health.

The £1.8bn STF is non-recurrent and only in place until 2018/19. The original intention of the STF was that in 2016/17, it would be used to reduce provider deficits and then from 2017/18 an increasing share would be allocated towards ‘transformation’ funding rather than ‘sustainability’. This has, for good reason, not materialised in light of the ongoing financial challenge facing the sector. Instead the national bodies have committed to a further £1.8bn in 2017/18 and 2018/19. The STF has now become such a core income stream for the provider sector, it is difficult to conceive how the sector could continue without it from 2019/20.

Providers of emergency care received a higher proportion of STF funding. The overall disposition of the £1.8bn in 2016/17 has been split between a £1.5bn general fund allocated on the basis of emergency care; a £0.1bn general fund allocated to non-acute providers; and a £0.2bn targeted fund. This means that providers with A&E services would be eligible for a much higher proportion of STF funding, relative to their turnover. This was to support the ongoing focus on improving emergency performance and a recognition that deficits have been concentrated in acute providers. However in practice all providers, irrespective of the services they provided, could benefit from the incentive and bonus scheme should they outperform on their control total. This meant that ambulance, community and mental health providers received a higher proportion of the £1.8bn than originally forecast.