Understanding the drivers of deficit: the system or the organisation?

The Health Foundation has today published A perfect storm: an impossible climate for NHS providers’ finances?, one of the most comprehensive analysis yet of why the finances of NHS providers in England are in the state they are.

NHS trusts and foundation trusts will welcome the report’s recognition that the decline in provider finances is a result of systemic factors, rather than widespread financial mismanagement by provider boards. The report also provides a timely opportunity for policy makers to reflect on the policy levers which may have contributed to the predicament the NHS finds itself in.

Although the analysis looks back at why NHS finances are in the midst of a perfect storm, it also provides some useful food for thought as we try to navigate through to 2020.  

Being honest about the NHS’s productivity opportunity

Today’s report reminds us of the gulf between how efficient the NHS needs to be – 2-3% by 2020 as outlined in the Five Year Forward View  – and how productive it actually is, which is that provider productivity continues to fall by up to 0.5% a year and overall increased by only 0.3% between 2009/10 and 2014/15 – an average rate of 0.1% per year.  

Particularly concerning is the finding that less productive providers have so far been unable to catch up to more efficient providers, which is one of the key conditions for delivering the £5bn savings identified in Lord Carter’s review into operational productivity. Significant improvements in provider productivity are possible, but improving the efficiency of clinical services and redesigning how care is delivered within local health economies takes considerable time and is hotly debated within local communities – national and political support will be essential to move this forward.

The holy grail of good quality and good finances

Another key finding in today’s report is the link between quality and finance - hospitals rated as ‘inadequate’ in terms of quality and safety by the Care Quality Commission (CQC) were associated with larger deficits. This is a view often promoted by NHS national leaders.  

It might feel intuitively right that higher quality care costs less, but this is not (yet) borne out in data. We simply know that quality and finance are related, not how or why they are related.

In the current climate it has become almost impossible for a trust to balance both finance and quality, as evidenced by the 95% of hospitals reporting a deficit this year. We need clear and consistent messaging from the national bodies about how to manage the limited resources available, for example around safe staffing levels and performance against national access standards. 

The escalating staffing costs

Today’s report confirms that a significant factor explaining the deterioration in providers’ finances is the growth in temporary locum and agency staff. This in turn raises questions about whether policies around pay and supply of the workforce remain fit for purpose.

Public sector pay restraint has been crucial in meeting the funding challenge over the past five years, but the government needs to carefully consider whether this is still sustainable. There is no doubt that the policy has made it harder for the NHS to recruit and retain staff, exacerbating spend on temporary and agency staff. If we don’t manage to turn the tide on staff moving to agency work, or moving out of the NHS entirely, we will not be able to tackle the biggest driver of the deficit. Addressing this needs to be a shared responsibility between local employers and national bodies.

The national level has introduced a number of measures to help providers contain escalating agency costs, and this is already having an impact. But unless we address the policy drivers, we might simply kick the (cost) can down the road without addressing the root causes.

Fixing the payment system

For the past five years, NHS trusts have had to cope with reductions in the prices they receive for the work they do, as the efficiency requirement in the national tariff has been one of the levers pulled to help the NHS live within its means. The impact that this has had on provider finances is clear from today’s report – trusts that receive a higher share of income through the tariff are more likely to be in deficit.

The organisations responsible for price setting – NHS Improvement and NHS England – have recognised that this is not a sustainable strategy and have since lowered the efficiency requirement in the tariff for 2016/17, and have indicated they will do so for the rest of the parliament. This is a welcome recognition and revision of an approach that was not working, and will be the single biggest factor contributing to provider financial sustainability next year.

A wake up call  

This publication serves as a reminder of why NHS providers have been operating in an impossible climate. Although there are clear systemic factors creating a perfect storm for the whole sector, it would be wrong to conclude that all or any of this is out of providers’ control.

There are still a handful of providers who are a) in surplus, b) meeting their quality and access targets, and c) have received a good or outstanding rating from the CQC. These are organisations who are still finding a way to navigate through the storm; they may be exceptions to the (current) rule but there is a lot we can learn from them. In this way, we need to support providers to move beyond a focus on understanding the drivers of failure, towards a relentless focus on understanding how other organisations thrive, and how this can be replicated in their organisation.

Phillippa Hentsch is Policy Advisor for funding and resources at NHS Providers, the membership organisation for 94% of all NHS foundation trusts and aspirant trusts - NHS acute hospitals, community, mental health and ambulance services. Read the related blog by Sarah Lafond, Senior Economics Analyst at the Health Foundation on the NHS Providers website.