The NHS is in the middle of the longest and deepest financial squeeze in its history. NHS cost and demand rises by around 4% a year but, between 2010 and 2020, health funding will only increase by less than 1% a year on average.

This financial squeeze has translated into lower prices paid for activity carried out by NHS trusts and unrealistic assumptions about how much trusts can generate in efficiency savings. At the same time, costs in the provider sector have risen as a result of increases in staffing levels following the Francis Inquiry into the failings in care at Mid-Staffordshire NHS Foundation Trust.

Taken together these factors have led to a record official provider sector deficit of £2.45 billion in 2015/16 and an underlying deficit nearer £3.7 billion. At the end of 2015/16, two thirds of all trusts were in deficit, with deficits affecting all types of provider. This demonstrates that the financial problems are systemic as opposed to poor financial management by individual trusts. Similar financial pressures are building in the commissioning sector and the NHS is also suffering from a funding crisis in social care.

There is a short term plan to eliminate the provider sector deficit in 2016/17 and 2017/18. Midway through 2016/17 this plan was on track, with the sector on course to reduce its deficit for 2016/17 to -£669 million. This reflects a significant amount of hard work by hospital, mental health, community and ambulance trusts.

Substantial risk remains, however, as trusts need to increase their rate of savings to reach the desired -£580 million year-end target. This level of risk is reflected in our survey with nearly half of chairs and chief executives believing that the financial performance of their trust would either slightly or considerably deteriorate over the next six months.

Trusts are also concerned about the long-term sustainability of a deficit reduction approach that is dependent on short-term, non-recurrent, actions such as land sales, capital to revenue transfers and accounting adjustments. This echoes concerns recently voiced by the National Audit Office.

Longer term, NHS funding increases are due to slow significantly over the next four years. Taking account of reductions to the wider health budget and population growth, health funding will actually decrease in real terms per head in 2018/19 and 2019/20. Given the performance pressures that already exist, tough choices will be needed to match what the NHS delivers to the funding available. There is currently no clear, realistic, plan to achieve this objective – again, a concern recently voiced by the National Audit Office.


Longest and deepest squeeze in NHS history

Despite the need to both maintain and transform services, the percentage of our GDP spent on health lags behind comparable countries. For example, we would need to increase health spending by over 10% to close the gap on France and Germany, and out of the G7 group of countries only Italy spends a smaller percentage of GDP on healthcare than the UK. This comparative lack of funding has contributed to the NHS facing significant financial and operational pressures.

The government is investing additional funding in the NHS but the exact amount is disputed. The government says it is handing the NHS in England a real-terms increase of more than £10 billion over the period from 2014/15 to 2020/21. This includes the commitment to fund the Five year forward view. However, independent experts such as The King’s Fund, Nuffield Trust, Health Foundation and the health select committee, say that total health spending in England will rise by around £4.5 billion in real terms between 2015/16 and 2019/20 (the spending review period). This is equivalent to a 1.1% real terms annual increase at a point when cost and demand will increase by at least 4%.

Trust leaders are particularly concerned about the lower funding increases the NHS will receive over the next four years with these dropping from + 3.7% in 2016/17 to +1.3%, +0.3%, +0.7% and +1.3% in 2017/18, 2018/19, 2019/20 and 2020/21 respectively – the so-called “NHS funding U bend”. The problems the NHS is having in balancing NHS finances in 2016/17 shows how stretching it will be to achieve financial balance within the much lower increases of the next four years.

Record deficit among trusts

The provider sector ended 2015/16 £2.45 billion in deficit. However, last year's deficit was, in reality, around £3.7 billion after one-off accountancy adjustments, central cash support and capital to revenue transfers are taken into account. Trusts have also had to absorb an additional £1 billion in pension charges. This deterioration in trust finances is unsustainable for the NHS and several factors contributed to this position.

The first is that, in recent years, trusts have been paid less for the treatments and procedures they carry out. The national NHS tariff, which sets the prices trusts are paid, has been cut by an average 1.6% in cash terms a year over the six years to 2015/16. This reduction in tariff prices fell well short of the cost and demand increases facing trusts. NHS Improvement and NHS England have now set a more realistic tariff for 2016/17, but a large deficit has already been created.

The second is that, as the NAO has recently pointed out, trusts have been expected to deliver unrealistic levels of efficiency savings. They delivered annual savings of 1.4% on average between 2008/9 and 2013/14, in line with or slightly better than historic performance. This was against an unrealistic target of 4% set for the last six years. The Nuffield Trust calculates that trusts have been asked to deliver higher levels of efficiency savings of 4% in 2016/17 and then 3% in 2017/18. This level of year-on-year efficiency savings has never been achieved in the NHS before and is unlikely to be delivered.

The third is that costs in the provider sector have risen as a result of increases in staffing levels that followed the Francis Inquiry. With concerns over the provision of high-quality care, many trusts increased their staffing bill, often through additional spending on agency staff. Estimates of the increase vary, but NHS Providers believes that at least £1.5 billion of extra staff costs were added to trust pay bills towards the end of the last parliament without matching funding.

And, finally, trusts have faced a number of unfunded costs. In particular, they have been hit with additional costs following changes to pension rules. This is estimated to add around £1 billion to the pension cost of NHS trusts from 2016/17. Other unfunded costs include increases in CQC fees and insurance premiums, reductions in payments for quality (CQUIN) and contractual fines.

The number of trusts in deficit

The deficit position of trusts is the most immediately pressing issue for the NHS. At the end of 2015/16, just under two thirds of all NHS trusts and three quarters of all hospital trusts – 153 trusts in total – were in deficit. This number has increased dramatically over the last four years. For example, in 2009/10 just 8% of trusts were overspent. Another feature of the provider deficit problem has been its spread from the acute sector to community, mental health and ambulance trusts. Again, the number of trusts now in deficit (see figure 2.1) and the fact that deficits cover all sectors, demonstrates provider deficits are a systemic problem facing the NHS, rather than one caused by poor financial performance from individual trusts.

Figure 2.1

Number of trusts in deficit

These financial pressures are no longer confined to trusts. At Q2 2016/17, 84 CCGs were over-spent with a total over-spend of £236 million. This situation is being compounded by cuts to social care budgets. Since 2010, local government’s funding from central government has been cut by 40%. Over the same period social care funding reductions have totalled £4.6 billion, a 31% reduction in real terms.

The growth of provider deficits has made provider financial control significantly more difficult as the traditional approach to financial control of setting, and then delivering, a break-even budget is no longer feasible.

Short term plan to eliminate the deficit

There is a short term plan to eliminate the provider sector deficit in 2016/17 and 2017/18. This is based on setting a more realistic tariff for the care and treatment provided by NHS trusts; the use of £1.8 billion of sustainability and transformation funding; and accompanying control totals for each individual trust. The financial control totals agreed between NHS Improvement and individual trusts represent “the minimum level of financial performance, against which their boards, governing bodies and chief executives must deliver in 2016/17, and for which they will be held directly accountable” (NHS Improvement 2016). These were designed to deliver an NHS Improvement and NHS England agreed 2016/17 year end aggregate deficit for the provider sector of -£580 million.

Medium term gap

NHS funding has been ‘front-loaded’ in the first year of this parliament, with a 3.7% real terms increase in 2016/17. However, as figure 2.2 shows, much lower funding increases will follow over the next four years – 1.3% in 2017/18; 0.3% in 2018/19; 0.7% in 2019/20 and 1.3% in 2020/21. The gap between what the NHS is expected to deliver and the funding available will therefore increase.


Figure 2.2

NHS funding over the rest of this parliament

As outlined in the previous chapter, some of the assumptions made in the NHS Five year forward view, on which the current financial and NHS delivery plans for this parliament are based, have turned out to be incorrect. Demand for care is a lot higher; social care is in a much worse state; general practice is turning out to be more unstable; and the starting point for the deficit among hospital, mental health, community and ambulance trusts has turned out to be much larger. An extra £8 billion on the health budget was the lowest amount the NHS asked for over the spending review period. In reality, the health budget only received an increase closer to the £4.5 billion mark and plans for the NHS to generate £22 billion in efficiency savings were too ambitious.

The obvious gap the NHS is now left with is a realistic plan for the rest of the parliament which matches what is expected of the NHS to the much lower funding increases of the next four years. This plan also needs to address the problems of social care, particularly in light of decisions taken by the chancellor in the autumn statement not to provide extra funding for social care.


Against this backdrop, trusts are undertaking a wide range of activity to maximise their financial position, including:

Deficit reduction – halfway through 2016/17, trusts are making good progress at reducing their deficits. The last four years’ Q2 figures show: 2012/13 (+£60 million); 2013/14 (-£105 million); 2014/15 (-£630 million); 2015/16 (-£1.6 billion). If this trend had continued, we could have expected a provider deficit of nearly -£2.4 billion at Q2. However, supported by £900 million of sustainability funding, trusts have delivered a 2016/17 Q2 outturn of -£648 million. This is £968 million better than last year. The sector has stopped the runaway deficit train and is heading back towards financial balance. 

Tight paybill control, particularly agency spend – 65-80% of an average trust budget is spent on its paybill. One of the key features of the last three years has been the growth in agency spend following the need to increase staffing levels. Almost three quarters (71%) of trusts have now reduced their spend since this was made a priority in November 2015. Trusts are currently forecasting a £900 million full year reduction in costs, eliminating a quarter of the agency spend in a single year. Trusts have also deployed a variety of different ways of controlling their paybill including changing their staffing mix, reducing the size of their non-clinical workforces, developing lower banded new workforce roles and more effective staff rostering.

Efficiency, productivity and cost improvement gains – trusts are delivering significant efficiency savings and productivity gains year on year. The half year results from NHS Improvement show that cost improvements in 2016/17 are forecast to total £3.2 billion, an impressive £346 million (12%) higher than last year. This follows £2.9 billion’s worth of gains in 2015/16.  As part of this process, trusts have also been entrepreneurial in growing alternative sources of income. For example, Leeds Teaching Hospitals NHS Trust has been commissioned to help develop radiotherapy services in new cancer centres overseas through their Medical Physics and Engineering Department.

Delivering the Carter review – trusts are also working hard to deliver savings in line with Lord Carter’s review into unwarranted variation in trust spend. This includes rationalising pathology and back office services across sustainability and transformation plan (STP) areas as well as reducing clinical variation, maximising efficient use of estate and reducing administrative spending.

Financial special measures and financial improvement programme (FIP) – trusts in particular financial difficulty and those seeking further support have been working closely with NHS Improvement to improve their financial position. Eight trusts are in financial special measures and have been buddied with other trusts to support their financial improvement activity. Sixteen trusts have been working with specialised management consultancy support in the financial improvement programme.

Capital – given the tight restrictions on capital, trusts have been working innovatively with private sector partners to access much needed capital. For example, Burton Hospitals NHS Foundation Trust has established a commercial partnership with Health Innovation Partners Ltd that will provide access to private sector capital to finance new projects, and help with the acquisition of land and facilities to support NHS services.


Delivery of 2016-17 year-end target

Delivery of the year-end target of £-580 million will require trusts to increase their rate of savings. The provider sector will need to deliver a second half surplus of £68 million, a £716 million swing, which is very stretching. There is, therefore, significant risk to manage in the second half of the year.

This is reflected in the responses to our survey. As figure 2.3 shows, over the next six months, only 13% of chairs and chief executives think that finances are likely to improve at their trust, with nearly 50% believing they will deteriorate against plan. Some noted that the performance and finance targets they have signed up to are likely to be too stretching, which may result in them not being able to access their share of the £1.8 billion sustainability funding.   

Figure 2.3

Over the next six months, do you think the financial performance of your trust is likely to:

It is absolutely clear that these initiatives will not bridge the projected financial gap and deliver aggregate financial balance. In particular, the sustainability and transformation fund allocations and control totals which have just been issued are completely disconnected from the financial realities on the ground and are not deliverable.

Chief executive, trust    

In a separate survey in August 2016, we also asked finance directors in trusts for their views on their 2016/17 control totals. As figure 2.4 shows, almost 4 in 10 finance directors (38%) were not confident about hitting their control totals at the end of 2016/17, and a further 30% were unsure. They cited not being able to further reduce agency staff costs, lack of bed capacity, the rise in A&E attendances, and the ongoing impact on the NHS of cuts to social care as key risks in managing finances in the short term.

Figure 2.4

How confident are you about achieving your financial control total?

Sustainability of the current approach to deficit reduction

Trusts are concerned about the sustainability of the current approach to reducing the deficit. More specifically, many trusts are using non-recurrent, one off, items such as land sales, accounting adjustments and use of the capital budget for revenue purposes. This is reflected in the fact that only 75% of cost improvement plan savings in the first half of 2016/17 were recurrent, as opposed to the planned 91%.

Trusts have also said the control total regime is time consuming to administer and adds significant extra regulatory burden. It also involves a significant reduction in provider autonomy, potentially blurs trust board accountability and involves an unwelcome extension of central regulatory control. 

2017-19 planning and contracting

NHS trusts and commissioners are currently creating two-year operational plans to cover 2017/18 and 2018/19 which will lead to the agreement of two-year contracts. As outlined earlier, this contracting process will need to absorb a significant reduction in overall NHS funding from +3.7% in 2016/17 to +1.3% in 2017/18 and +0.3% in 2018/19.

Early reports from this process, based on initial commissioner offers, suggest that it will be difficult for commissioners and providers to agree contracts, given the degree of financial constraint the overall funding reductions imply. There is an additional degree of pressure in this process given the need to reach agreement by the end of December.

This pressure is reflected in our survey with many chief executives and chairs saying that low funding increases means a significant adverse impact on commissioner budget allocations for 2017/19. Many felt that this would result in difficult contract negotiations for 2017/18. Several respondents mentioned that negotiations with commissioners over disputed money also have the potential to contribute to the deterioration of their trust’s financial position. 

One chief executive said their financial position “will fall off a cliff if we lose the contract dispute, but if we do not, then it will fall away but remain better than break-even.” And a chair from a non-acute trust stated that their local position “depends on negotiations with CCGs for 2016/17 disputes worth £1m and the 2017/18 contract.  There is no extra money in the system so it is likely that providers will have lower allocations.” 

Reduced capital funding

Repeated raids on capital funding to reduce deficits have created an unsustainable situation for trusts. NHS providers require significant amounts of regular capital investment to maintain buildings, modernise facilities, invest in new treatments and IT, and fund much-needed transformation. As the NAO points out raiding future capital investment to prop up current revenue budgets could risk trusts’ long term ability to deliver services sustainably.

The capital budget for the Department of Health was reduced over the period 2010 to 2015 from £4.8 to £4 billion, and is set to reduce in real terms over the spending review period (flat in cash terms at £4.8 billion per annum).

These reductions in capital spending to meet budgetary pressures are having consequences. For example, the amount of high risk capital backlog maintenance for buildings and equipment has increased from £296 million in 2011/12 to over £775 million in recent years.

Risks for the remainder of this parliament

The biggest risk until 2020 is the current lack of national and local plans to close the gap between what the NHS is required to deliver and the lower funding increases for the next four years. Sustainability and transformation plans (see the transformation chapter) offer an important means of producing local plans but, as we set out, there are a series of escalating risks that need to be carefully managed if this planning process is to be successful.

Beyond 2020

Beyond the shorter term issues highlighted above, there is still little clarity or public debate over the long term strategy for the health service beyond the timeframe covered in the Five year forward view. What is required is an officially supported and impartial examination of NHS finances and demand in the longer term for the period from 2020-2040. This should take a longer term perspective that single parliaments and spending review periods are unable to bring. It should look instead to developing options and recommendations for the long term sustainability of the NHS. The work should engage with national bodies and the NHS frontline, look across health and social care and examine long term demographic trends. It should provide recommendations on the percentage of GDP we should commit to health and care and how this should be funded. Without this important piece of work we risk making short-term decisions that may need to be revisited or even unpicked as this longer-term context plays out.

WHAT providers need

Providers need greater realism and honesty about what can be delivered in the short, medium and long term. Given the level of risk in 2016/17, a year-end provider sector deficit of any less than £1 billion would be a significant achievement. We need to recognise, however, that the current approach to deficit reduction is not sustainable longer term. It is difficult to see how trusts can recover performance and sustainably deliver financial balance unless urgent extra investment is made in social and primary care. It is disappointing that the autumn statement missed this opportunity, particularly in social care.

Trusts are doing their best to realise efficiency and productivity gains, and cost improvements, including delivery of the Carter programme. However, having realised the immediately available savings over the last six years trusts lack the capacity and capability to realise the more complex savings that are now required. A judicious programme of investment could unlock these savings in larger amounts and at quicker speed than would otherwise be achievable.

We need to stop raiding capital to support revenue budgets. Instead, providers need a capital strategy with appropriate investment that properly meets long term needs.

Perhaps most importantly of all we need a realistic and honest plan to match what is required of the NHS with the lower funding increases of the next four years. A key element of this would be a much smaller number of strategic priorities with a realistic performance trajectory attached to each.