Life has few certainties, but it is beyond doubt that NHS providers were mired in a financial black hole during 2015/16. Tomorrow, the official report on the fourth quarter financial outturn for England’s hospitals is due to be published by NHS Improvement. The HSJ reports the overall deficit may be worse than feared, at around £2.7bn. To add to the gloom, that figure is not the whole picture. To get to that total, capital projects have been delayed and investment funds used to support day-to-day running costs. The underlying run rate deficit is almost certainly significantly worse than the headline total.

Whether you are of a glass half full or a glass half empty disposition, there is no getting away from the fact that NHS provider finances are, by every measure imaginable, in a truly dreadful state. The risks associated with the current financial situation should worry many more people than just those in the Treasury. While NHS finances have fallen off a cliff, performance on waiting times – only one aspect of quality, but one that still matters to patients and the public – has continued to deteriorate. A stark reminder that while the relationship between quality and money is complex, it cannot be ignored. Organisations under extreme stress are fragile and risky. And across the NHS the mood could not be bleaker.

Last summer it was clear that 2015/16 would be a nightmare year for NHS provider finances. Some short-term action was taken. Rather like firefighters trying to contain a raging forest fire, the decision was taken that it was too late to put out the financial fire in 2015/16 and the focus was on containment and establishing a firebreak, so that it didn’t spread to 2016/17.

Simon Stevens secured his number one priority of a ‘front-loaded’ settlement for the health service in the government’s autumn 2015 spending review. Although the spending review’s overall settlement for health was low, the frontloading appeared to offer a chance to get the NHS back on an even footing. NHS England was allocated £5.5bn in headline cash terms for 2016/17, including a sustainability and transformation fund (STF) of £2.1bn.

The STF was created to act as the firebreak to help eliminate provider deficits by the end of 2016/17 and support the large scale transformation set out in the Five Year Forward View. At the same time, prices paid through tariff would rise above inflation in 2016/17 for the first time since 2011. A quick contracting round would then be followed by the development of multi-year plans across broader health economies (the Sustainability and Transformation Plans, or STPs) to enable real improvement and transformation of the health and care system. It looked like a plan. 

Sadly, it now seems the firebreak is not big enough and the plan is unravelling with frightening speed. The waterfall chart shows how the various calls on the extra £5.5bn add up. About half of the money is needed to keep up with population growth, and rising pay, pensions and price inflation. England has also committed to service improvements in mental health and primary care. Taken together, the cost pressures add up to around £4.5bn. Add into the mix a deficit in the region of £2.7bn to be plugged and the pressures exceed the overall increase. Of course, the NHS will deliver some efficiency improvement.  If it achieves 2% on the provider side as set out in the tariff plans, and £300m of activity-related savings, these pressures would be offset by just over £2.1bn of savings. Overall, out of the £5.5bn cash uplift, there might be about £400m left. 

This £400m has to stretch a very long way. It has to fund transformation, fill the hidden additional hole from the reliance on one-off savings last year, meet the pressures of an aging population and fund rising expectations and new technology. And this depends on a 2% efficiency target that, while more realistic than previous targets, is still a much greater rate of efficiency improvement than the NHS provider sector has been able to sustain over recent years.  All in all, a sobering picture.

Beyond the numbers perhaps the greatest sadness comes from the way the 2016/17 contracting round has played out. The firebreak strategy is partly about numbers but it was also supposed to be about behaviours. Local health leaders were to quickly reach contract resolution to enable them to come together to develop long-term sustainable approaches to local health services. Ideally this would not create NHS winners and losers, but a whole system focused on solutions for local people and patients. Instead, by all accounts it is one of the most fraught contracting rounds anyone can remember. Getting the STP process on track is vital. But so too is a clear programme of national action on some of the fundamental drivers of efficiency and cost – most notably workforce. While the financial problems are manifested in local provider deficits, the solutions will require all the organisations of the NHS – provider and commissioner, local and national - to play their part and work as one NHS.  


Anita Charlesworth is Director of Research and Economics at the Health Foundation. This blog was co-authored by Adam Roberts, Head of Economics at the Health Foundation. This blog originaly appeared in the HSJ online on 19 May 2016.

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