NHS provider deficits are back: how bad is the situation?

NHS trust deficits have slipped out of the news headlines in recent years, reflecting both a brief let up in the financial pressures on them during the pandemic and also the political shift of focus from individual organisations to local health systems.

But there is no denying that provider deficits are back. At the halfway point in the current financial year, 41 of England’s 42 integrated care systems were overspending against plans, with provider deficits driving the overspend in all but five. NHS provider trusts are the organisations that provide the vast bulk of NHS-funded ‘secondary care’ in England, comprising acute hospital, specialist, community and mental health care, as well as ambulance services.

In this analysis, we disentangle the impact on the most recent set of provider accounts of an accountancy standard change that has made it hard to compare recent financial health to that of the past (see box below). This allows us to provide a comparable figure for trust deficits overall, as well as by trust type (acute, specialist, community and mental health), region and patient deprivation levels.

This information is essential to understanding the overall financial health of the National Health Service ahead of the next Comprehensive Spending Review. NHS provider spending makes up over three-quarters of NHS England’s entire day-to-day expenditure, and so, to a very significant extent, providers make the NHS’s financial weather. If a large proportion of providers are in financial distress and struggling within budgetary constraints, so too is the entire NHS.

What was the total overspend in 2023/24?

The implementation in 2023/24 of a major accountancy change across the NHS and other parts of the public sector (see box) led to NHS provider trusts reporting expenditures £1.1 billion higher in 2023/24 than they would have reported under the previous accountancy standard, worsening the overspend for the year from £1.2 billion under the old standard to £2.3 billion under the new.

The published consolidated NHS provider accounts for 2023/24 helpfully provide a note setting out the impact of the change (and related technicalities) across the provider sector as a whole, which allows us to make like-for-like comparisons between the provider-sector-wide overspend in 2023/24 and previous years. This reveals a more than doubling of the overspend from £457 million (0.4% of income) in 2022/23 to £1.2 billion (0.9% of income) in 2023/24, once the impact of the accountancy change is removed.

In order to dig deeper and compare that deterioration in financial health at a regional and more detailed service-sector level, we stripped out the impact of the accountancy change for each affected trust using the individual account data. To account for inflation and spending growing as a result of population change, NHS trust financial surpluses and deficits are best considered as percentages of income, rather than as absolute values. 

Trust financial health has been getting worse since 2021/22

The chart shows that, even after removing the impact of the 2023/24 accounting change, the provider overspend that year represented the latest data point in what has been the longest and steepest decline in NHS provider financial health since 2015/16. That decline has seen a reversal of the modest (0.5% to 0.6%) surpluses seen over 2020/21 and 2021/22, and has returned the provider sector to a similar overall position to 2019/20, when financial instability left it poorly equipped to deal with the pandemic.

It’s not just acute trusts that have a deficit problem now

Although the 0.9% overspend in 2023/24 is still smaller both in relative and absolute terms than the reported £2.2 billion overspend in 2015/16 (2.9% of income), a striking new development is where those financial difficulties are taking place.

In the past, overspends have been almost entirely concentrated in the acute hospital trust sector. This has now changed: while acute hospital trusts still report the deepest deficits (1.2% of income), the steepest declines since 2019/20 have been in specialist trusts (reporting overspends of 0.9% in 2023/24, down from a 1.8% surplus in 2019/20) and mental health trusts (reporting a 0.1% overspend in 2023/24, down from a 1.1% surplus in 2019/20). Community health trusts reported a 1.4% surplus in 2019/20 and are the only sector to generate a surplus in 2023/24, albeit modest and significantly reduced at 0.2% of income.

A closer look at the figures for specialist trusts reveals the sharp deterioration within that sector is driven by two trusts in particular: Liverpool Women’s NHS Foundation Trust, which saw a 13.4 percentage point increase in its overspend (from £2.7 million in 2022/23 to £22.6 million in 2023/24), reflecting in part a 4.3% cash drop in its income, and the Christie in Manchester, whose £62.6 million deficit is largely driven by a change in accounting and governance arrangements for its charity.

If the Christie figures are excluded, the specialist trust sector as a whole remains in financial balance, although its surplus has more than halved in a year, from 1.2% to 0.5% of income. It is also important to note that Birmingham Women’s Hospital Trust is one of five trusts missing from our figures for 2022/23 and 2023/24, as they have not yet published their accounts for 2023/24.

The overall position for community health care trusts also masks significant variation between individual providers, with 80% of the gross surplus sitting in just three individual providers. The most significant of these is Kent Community Health Foundation Trust, whose £11.6 million surplus is equivalent to 45% of the entire gross surplus in the sector.

But deficits are worse in more deprived regions than others

Regionally, the deepest deficits are in the North West (2.5% of income) and the Midlands (1.5% of income) which, along with the North East and Yorkshire, have also seen the steepest declines in financial health since 2022/23. Removing the Christie figures from the North West slightly reduces the region’s deficit for 2023/24 (to 2.2% of income), but still leaves it with the sharpest decline.

These regional declines also read across to a socioeconomic pattern in the recent financial declines of providers. The 23 acute hospital trusts caring for the highest proportions of patients from the most deprived neighbourhoods of England experienced, on average, a 1.2 percentage point decline in their financial health in 2023/24, compared to a 0.7 percentage point improvement in financial health in the 23 acute hospital trusts with the lowest national share of patients from the most deprived neighbourhoods.

This reversed a pattern seen in 2022/23, when hospitals serving the poorest areas had on average more stable finances, and likely reflects the incremental removal of additional funds provided during the pandemic.  ¹

Lower income growth is associated with a higher shortfall

Overall, the 41 trusts with the largest declines in financial health between 2023/24 and 2022/23 saw the tightest pinch on their incomes, with revenues growing on average by 4.6% in cash terms – a real-terms cut of 0.6% when adjusted by NHS inflation for the year of 5.2%, which includes the impact of staff pay increases.

By comparison, the 41 trusts with the largest improvements in their finances (who on average converted deficits into very modest surpluses) saw their income grow by 8.4% in cash terms, while the provider sector as a whole saw cash income growth of 6.5% (a real-terms 1.2%, against NHS inflation).

In recent years, trusts have been able to earn additional income by exceeding their elective recovery targets – expressed in terms of the financial value (or cost weighting) of elective activity compared to pre-pandemic levels (2019/20). Comparing trust performance against this measure in 2023/24 with their financial position suggests a pattern where trusts that, on average, performed least well on increasing their cost-weighted elective activity had the steepest financial decline between 2022/23 and 2023/24.

This points to the role of operational pressures such as bed capacity and patient acuity in financial deterioration, with acute providers serving the largest share of deprived patients falling the furthest behind on the cost-weighted elective recovery metric by March 2024. ²

And so are increased costs

Unsurprisingly, trusts with the largest declines in financial health not only experienced, on average, real-terms cuts to their income, but also the steepest increases in their costs. Most strikingly, trusts with the largest deteriorations in their finances saw their pay costs increase as a share of their turnover, at a time when other trusts, on average, reduced the relative size of their pay bills. This was predominantly done through cutting temporary staff costs – something those with the largest deteriorations did not manage to do.

It is important to note that 2023/24 saw widespread strikes among medical staff, which is likely to have had a varied impact across trusts and driven some of the increase in temporary staffing. Perhaps related, the fifth of trusts with the steepest declines in their finances had, on average, significantly increased their expenditure on outsourcing care to the independent sector – a 23% increase above 2022/23 levels (cash terms), compared to an 11% increase for the provider sector as a whole.

Prospects for this current financial year point to further deterioration

Out of the 205 operational trusts publishing accounts for 2023/24, 112 reported overspends, averaging 2.3% of income, while 76 reported surpluses averaging 1% of income (the remainder broke even). That represents a shift since 2022/23, when 98 individual trusts (just under half) reported deficits averaging 1.7% of income and 88 reported surpluses averaging 1.1%.

The shift is uncomfortable because, aside from the clear operational difficulties being experienced within the majority of trusts, the growing numbers of organisations in deficit make it harder for the government to dismiss overspending as the result of outlying poor management, rather than systematic difficulties squaring the twin demands to hold down health care spending while simultaneously increasing activity and standards.

At the time of writing, NHS England has published summary information about the level of trust under- and over-spending against annual plans at the midway point for the financial year 2024/25. These figures are not directly comparable to audited surpluses and deficits in the accounts, and trust positions in September may not be a reliable guide to where they will end the year – particularly as it is not clear how staff pay deals settled mid-year have been reflected in the figures.

However, the data shows a £1.3 billion deficit at the mid-year point, suggesting that further deterioration should be expected compared to 2023/24. In particular, the mid-year figures indicate that trusts that sat in the middle of the pack in 2023/24, in terms of the relative size of their overspends (with medium to relatively small deficits, or financial balance), were reporting the largest negative gaps between their plans and actual position by the end of September 2024.

A summary update on the aggregate provider sector published last week (February 6) also points to further deterioration, with trusts ending December 2024 with a £1.6 billion (or 1.5%) gap between income and expenditure.

And the underlying position is also getting worse

In the past, the Nuffield Trust has highlighted a significant gap between the size of deficits reported in trust accounts and their underlying position, which represents the gap between recurrent, reliable income coming into trusts and their recurrent expenditures. This gap peaked, under the first and last official estimate in 2018/19, at £5 billion, or around 5.7% of income.

The figures cited in the current analysis are not directly comparable to that underlying deficit figure, as they reflect the total of trust reported positions in their accounts. That is, they show surplus and deficit positions after what can sometimes be an astonishing array of measures serving to disguise or minimise financial difficulties, and balance trust, NHS-wide and ultimately DHSC books.

The gap between the sector’s reported deficit in 2018/19 (£574 million) and its underlying £5 billion position was made up of raids on the supposedly ringfenced capital budget (intended to fund building repairs and investment in new technology), non-recurrent efficiency savings such as delaying invoice payments, and temporary “sustainability” funding injections designed to prop up provider finances, which had been diverted from budgets originally intended to support service improvements. Removing those unreliable, non-recurrent sources of income or savings worsened the deficit from the reported £574 million to the underlying £5 billion, of which half was related to sustainability funding (specifically, the Provider Sustainability Fund).

Since that time, the diversion of service improvement funds into funding streams designed to support trusts in financial difficulty has become so normalised, it is difficult to draw a firm boundary around what can genuinely be viewed as “temporary” and what has become a long-term figure within the NHS financial landscape. When estimating a comparable underlying deficit for 2023/24, it therefore makes most sense to discount the issue of temporary sustainability funds, which brings the comparable underlying deficit figure for 2018/19 to £2.6 billion.

To help us build a picture of the underlying gap between provider income and expenditure in 2023/24, NHS England has provided us with an estimate of non-recurrent savings made in 2023/24 of £3 billion, which indicates the level of expenditure temporarily avoided or put off in 2023/24 that will need to be found in 2024/25.

Parliamentary reports show a further £400 million raid on the capital budget in 2023/24 to fill gaps in the provider workforce bill. Together with the reported overspend, those factors would bring the underlying deficit for 2023/24 to at least £4.5 billion – significantly higher in absolute and proportional terms than a comparable £2.6 billion figure for 2018/19, adjusted to discount the impact of temporary sustainability funding streams.

Prospects for 2025/26

In late January, NHS England published details of funding allocations to health systems across England for the financial year that starts in April, showing a planned 4.1% cash increase in recurrent core allocations.

On the face of it, that compares favourably to the Treasury’s preferred estimate of inflation in the domestic economy (forecast in December to be 2.4% in 2025/26). But it translates into a real-terms funding cut when compared against NHS England’s estimate of cost inflation in the NHS next year of 4.2%, which includes the impact of higher Employment National Insurance Costs, as well as what may yet prove to be a rather low early estimate for NHS staff pay increases for the year of 2.8%.

To make good and balance that budget, NHS commissioners and patients will expect trusts to deliver more care to meet rising patient demand and waiting time standards, yet to do so at lower unit costs than they have managed this current year, while also closing down a 2024/25 overspend in the likely region of 1.5%. Overall, that equates to a demand for a 4% increase in NHS productivity – more than four times the annual rate of productivity growth in the decade before the pandemic.

Fluctuations in productivity since then – first recording huge drops in outputs during the pandemic and then large increases from a low baseline – might give ministers some reasons to be optimistic for continued, relatively high productivity increases in 2025/26. However, with NHS England estimating productivity growth at around 2.4% in the first half of this current year, the prospects for stretching that further to 4% seem unlikely, even without the significant mismatch that exists between NHS England and Office for National Statistics estimates on progress.

This analysis has shown the fragile state of NHS provider finances, which are facing the prospect of a third year in a row of deteriorating deficits. We highlight concerning signs that overspends are beginning to be systemic across the country, with particular concentrations in the North West and Midlands, and signs of increased financial instability in areas serving the poorest populations.

Our analysis raises real questions about the feasibility of the government's twin aims to hold down health care spending while increasing activity and performance standards. It also provides important context to the upcoming Spending Review and forthcoming 10 Year Health Plan about the challenges faced when seeking to shift care from the acute hospital sector towards community and primary care.