When is £2.1 billion of funding not actually £2.1 billion of funding? Seemingly when it’s awarded to NHS providers in exchange for pulling off £800 million in spending cuts they might otherwise not have troubled themselves with.
The NHS has engineered some pretty impressive accountancy fiddles over the last three years, with an underlying deficit of over £4 billion in the provider sector massaged down to the slightly more palatable £1 billion mark in the reported accounts. But as ever, the more audacious manoeuvres remain the preserve of Whitehall.
The short history of the £2.45 billion Provider Sustainability Fund looks set to be the latest masterclass in financial trickery. But this isn’t just a story of paper-based conjurey to disguise the true disarray of NHS finances. The scale of the trick risks undermining scores of hospital trusts across England, while betraying promises made to patients and clinicians over three years of financial pain.
Control totals and sustainability funds
Starting life in 2016/17 as the £1.8 billion Sustainability and Transformation Fund (STF), then rebadged and uprated to £2.45 billion for 2018/19, the Provider Sustainability Fund has been used to incentivise NHS providers to gradually reduce the overall net deficit in the sector, doing so by doling out cash rewards in return for meeting financial targets.
These targets, known as ‘control totals’, essentially give each trust a bottom line figure for their income and expenditure accounts. For those organisations deep in deficit, the control total was often a deficit figure, albeit one requiring a real terms spending cut in excess of 4% within the year, as the organisation was dragged slowly out of the red.
But with Treasury impatience what it is, it couldn’t all be like that. The requirement for the provider sector as a whole to at least aim for a financial balance meant that, if some were so deep in deficit they would need years to recover, others would need to generate surpluses to at least partially offset the overall bad news.
And so in 2016/17, around a third of provider trusts were set control totals that required them to collectively spend around £270 million less that year than they actually earned – the equivalent to each cutting their spending by an extra 1.2% beyond the 2% needed to absorb the cost of inflation and balance their own books. Put another way: these 80 or so providers were asked to make real terms spending cuts almost two-thirds bigger than strictly necessary to maintain their own financial health.
Incentivising spending cuts
The question for staff and boards at these providers might have been: why should we agree to spend less on caring for patients and employing staff than we can actually afford?
The answer was the £1.8 billion STF, as trusts meeting their control totals were rewarded with cash payments from the fund. The scale of the prize on offer at the start of the year meant that if those trusts held back spending by an extra £270 million, the ‘tripartite’ of the Treasury, health department and NHS Improvement would almost match that saving again in cash rewards from the STF. It sounded like a no-brainer: one more year of pain in exchange for a significant pile of extra cash.
Further swathes of the STF were also offered towards the end of the financial year, to incentivise spending cuts to go further still. Inevitably not all trusts managed to hit their targets, but by the end of the year, £457 million of the STF was awarded to 77 trusts as reward for them underspending their main income by £200 million.
The catch of course was that the resulting £657 million surplus reported by those organisations had to sit unspent in their end-of-year accounts, as it was badly needed to offset the much bigger gross deficit ran up by the remaining trusts.
It was a similar story in 2017/18. Trusts were again set control totals in an attempt to coax the sector closer to an overall financial balance. On average, those control totals required in-year real terms spending cuts of 4.3%.
This time, it resulted in 90 trusts collectively generating £370 million more spending cuts than they strictly needed to break even themselves, for which they were rewarded with £732 million from the STF. Again the resulting £1.1 billion surplus for the year at those 90 trusts had to remain unspent, so to flatter the sector-wide income and expenditure position.
In 2018/19 the fund was increased to £2.45 billion, with control totals yet again requiring average spending cuts in excess of 4% of operating costs within a year. Based on financial performance to December 2018, it seems likely that the full financial year will have seen around 75 NHS providers receive around £900 million in sustainability funding, in return for generating another £200 million underspend against their other annual income.
For over three-quarters of those providers, 2018/19 was the third year in a row where they cut their spending beyond the level required to balance their own books. They will have done so for the good of the overall sector position and, of course, for their share of the aggregate £2.1 billion in sustainability funding – awarded to a total of 102 separate NHS organisations over the last three years, in exchange for cutting spending by more than they needed to just balance their own books.
So again: what was in it for those organisations?
It was of course the promise of spending that sustainability cash in the future. They could in theory spend it on anything, but in a context of control totals – and 2019/20 is the fourth consecutive year of the regime – spending cash earned in a previous year reduces an organisation’s ability to meet its control total, as that target is focused on pushing annual spending below the income earned that specific year.
Trust finance directors have always understood this. But the way to get around it was capital expenditure, which is not charged to the income and expenditure account against which the control total is measured, but funded instead from an organisation’s cash savings – and the sustainability fund prizes were all in cash.
So the last three years have seen finance directors across NHS providers in England promise their staff and boards that yet another year of additional slog on their cost improvement plans, another year sucking up recruitment freezes, overtime bans and restrictions on purchasing supplies, would be worth it. That another year – 2018/19 being the ninth in a row – of trying to cut operational expenditure by at least another 4% in real terms would pay dividends, not just to the sector financial position as a whole, but to the patients and staff at their hospital in particular.
And the reason it would be worth it – finance directors have stood up and said in both board meetings and to groups of habitually sceptical clinicians – is because the resulting sustainability cash would be spent on buying new kit. New scanners, new monitors, new operating theatre equipment, or alternatively on fixing part of the £3 billion NHS-wide maintenance backlog that poses real risks to patients as it disrupts care or makes it impossible.
That promise was all the more relevant given that the majority of these cash-rich providers were NHS foundation trusts. And they, unlike the more tightly regulated and controlled NHS trusts, are able to invest in capital as they please, without health department sign off.
Treasury spending controls
NHS trusts have never had that freedom, because spending by individual NHS organisations counts against the expenditure limits set by the Treasury for the health department as a whole. The Treasury uses these spending limits to enforce its fiscal framework to hold down government spending in general and, when it comes to capital spending in particular, net borrowing. From the Treasury’s perspective, even capital spending funded through an NHS organisation’s own cash (rather than a government grant) is troublesome, because if NHS hospitals aren’t spending their cash, it sits instead in the Government Banking Service. There it can effectively be recycled and lent out to other parts of the public sector, thus reducing the government’s overall need to borrow.
This accounting policy is as true for NHS foundation trust spending as it is for NHS trusts. After all, despite foundation trust freedoms and political agitation to the contrary, it has always been accepted that the government ultimately stands behind foundation trusts to protect patients from the risk of financial or organisational failure. That leaves foundation trusts squarely on the government’s balance sheet.
However, since the introduction of foundation trusts in 2004, the perceived benefit of allowing them the freedom and independence to accumulate surpluses (to invest as their boards and governors see fit) has outweighed the health department’s concern to keep capital spending within its departmental limit. Until 2010, this fudge was aided by sufficient headroom in the Capital Department Expenditure Limit (C-DEL) for health to reassure Whitehall that a sudden foundation trust spending spree was unlikely to seriously threaten a dreaded breach of the C-DEL.
In more recent years, that reassurance has been found in the harsh reality of provider deficits – because organisations in deficit do not go on capital spending sprees.
But as providers slowly start to recover their financial position, and the health department’s capital spending allowance remains largely flat and curtailed, Whitehall is getting nervous about foundation trust capital spending ambitions – and the £4 billion of cash sitting on foundation trust balance sheets that could fund it. That cash balance has been boosted, of course, by foundation trusts making up the vast majority – four-fifths – of the 102 organisations awarded a total £2.1 billion in sustainability cash over the last three years.
So guess what? A new power for NHS Improvement to limit foundation trust capital spending has now been included in the list of primary legislative change sought, apparently because doing so will help implement the recent Long Term Plan (and by the way also help the health department stick to its spending limits).
The proposal means the removal of the fudge whereby foundation trusts were both independent of the health department yet the health department remained ultimately responsible for their spending. But it was a fudge that lasted – and ostensibly worked – for 15 years. Without it, foundation trusts would be no longer free to determine what they do with their surpluses, begging the question why should they bother making them at all? And is there a Plan B for driving efficiencies out of NHS providers?
More immediately, however, the proposal means the removal of the fundamental premise motivating most of the NHS providers who delivered a cumulative £800 million additional surplus to the system over the last three years.
Will those foundation trusts ever recover the trust of the doctors, nurses and support staff who sucked up and delivered more spending cuts than were strictly necessary, on the promise of more kit that may now never materialise? What will the cost of losing that trust be?
So much has been written and enthused over the last decade about the need for more “clinical engagement” in the endless quest for NHS efficiency, on convincing clinicians that efficiency is not just about harmful cuts, but rather better outcomes for patients. Yet it appears Whitehall is willing to potentially junk so much clinical trust, rather than contemplate the alternative remedy of seeking a marginal increase to the health department’s capital spending allowance to absorb the risk that continued foundation trust freedoms might pose.
Based on the increase in foundation trust cash bank balances over recent years, a one-off increase in the planned capital spending limit of £500 million over the next two years might be sufficient to absorb the risk – the equivalent to less than a 2% real terms increase in the spending limit a year.
Remember that would not be £500 million ‘more cash’ for the NHS. It would be a £500 million increase to the health department’s spending allowance in order to allow NHS organisations to actually spend the £2.1 billion already given to them with some fanfare.
Otherwise, that £2.1 billion cash handed to individual organisations over the last three years will become significantly less than the sum of its parts and take on a strange existence as perhaps a new accounting concept: shadow cash? Money in the bank, earned through blood, sweat and tears and yet which cannot be spent.
Gainsbury S (2019) "Having your fudge and eating it”, Nuffield Trust comment.