With strings attached: taking a closer look at the new NHS money

After it was announced in November there will be £1.6 billion extra resource spending for the NHS next year, Sally Gainsbury explores where that money will go.

Blog post

Published: 09/02/2018

In response to growing calls for significant extra funding for the NHS, the Chancellor has argued the Government prioritised the health service at the November budget, announcing £1.6 billion of “additional” resource spending in 2018/19. Combined with a small boost in the capital budget, this led us to say that roughly half of the extra £4 billion needed in 2018/19 was being provided. While this was not good enough, it is fair to say it was better than many had hoped.

Then late last week, when NHS England published its planning guidance for 2018/19, it seemed to get better still, with the Department of Health and Social Care suddenly finding a further £540 million from within its own budget to boost so-called “frontline spending” for the year.

We have been here before, with extra slugs of cash found from within the health department’s existing budget, and rarely does this transpire to be genuinely additional.

In the 2015 Spending Review, for example, £3.5 billion of extra “frontline spending” was funded through cuts to the Department’s public health and clinical training budgets, which ultimately translate into additional cost burdens on the “frontline”. The funding is shifted, but so too is the cost. The net result is that any “extra” spending is minimal.

What then of the Chancellor’s extra £1.6 billion? How much of that will translate into additional spending? The answer is that much of it will not. At least not in the sense that most people understand extra spending, which (reasonably enough) is as buying extra stuff: extra patient care, extra quality, extra doctors and nurses, extra drugs. In fact, in many cases it will be used to effectively cut, rather than increase, NHS spending in real terms per patient.

To some this might seem like an arcane feat of mathematical dark magic, so it is worth explaining it step by step. Step one is to think about which problem the £1.6 billion should be directed at fixing first.

Provider deficits

The main problem of course is NHS provider trust deficits. First bursting into the open in 2013/14, these deficits quickly escalated to a collective £4.3 billion underlying overspend in 2015/16, which only marginally improved in 2016/17.

Midway through the current financial year, providers were showing little signs of improving their financial health – despite making year-on-year efficiency savings significantly above the level indicated as possible by the government’s own analysis.

The root cause of these deficits is clear. The NHS tariff – the price list that determines how much hospitals and other services are paid for each patient they treat – was cut in cash terms every year from 2011/12 to 2015/16, and has not once seen a real-terms increase this decade. This means that this year, NHS trusts will make an average 5% loss on each patient they treat, reflecting the gap between how much they are paid to treat each patient and the actual costs of providing that care.

The problem isn’t just on the side of NHS providers. NHS commissioners – local clinical commissioning groups and NHS England – are having it tough too. They are the ones who have to pay the bills sent to them from providers, based on the prices set in the tariff. And while those tariff prices are too low to cover the full costs of care borne by hospitals, when combined with rising patient numbers they aren’t low enough for commissioners to afford.

Demand for NHS care is rising by around 3% a year – measured in terms of more patients needing more complex and advanced care, provided at a higher quality. But commissioner budgets have been set to increase by significantly less than that, leaving NHS providers and commissioners between a rock and a hard place.

Providers are running up huge losses on the slashed prices that commissioners pay them through the tariff, but commissioners cannot afford to cover even the increased number of patients needing care, let alone reflect the true costs of care in the payments they make to trusts for each patient they treat.

The road not taken

£1.6 billion “extra” resource could have gone a long way to fixing this. Half of it, for example, could have paid for a modest 0.75% increase in tariff prices (up from the 0% scheduled for the next two years), with the other half being used to top up the annual increase in commissioner budgets to match the 3% increase in demand.

Doing that – with potential variations to target specific types of care and/or organisation – would make a good start to fixing the NHS’s current deficit problem. It would move the price paid for secondary care closer to its actual cost, and increase commissioner budgets by a rate closer to the increase in demand they actually face.

However, that is categorically not what the “extra” £1.6 billion next year is doing.

Certainly CCG allocations are being increased by £600 million above the original plan for next year. But there are some smoke and mirrors there too. The £335 million extra funding for this current winter won’t be available next year, making the £600 million extra in the allocations feel more like £265 million.

Some of that may be countered by the removal of recent years’ requirement for CCGs to hold back around £370 million of their allocations to offset overspending elsewhere. But the overall impact of that will depend on how much CCGs are already overspending (NHS England have indicated around £400-£500 million this year), plus how much of that £540 million “extra” from the health department will be matched by hidden extra cost.

Of the remaining £1 billion from the Chancellor, £650 million is being pumped into the existing provider Sustainability and Transformation Fund (STF) – now appropriately rebadged (from 2018/19) sans-“Transformation” as the Provider Sustainability Fund (PSF). It will be boosted from its £1.8 billion level in 2016/17 and 2017/18 to £2.45 billion in 2018/19. A further £400 million is then being used to create a new Commissioner Sustainability Fund (CSF) that will operate and be policed in similar ways.

Provider and commissioner sustainability funds

The STF (like the PSF and CSF that will follow it) is comprised of cash that does genuinely leave the Treasury. But thereafter it takes on a strange guise that means it is not cash as we tend to know it – which is as something that allows extra spending above what would have happened without it.

Providers are awarded a slice of it only if they meet a Treasury-agreed financial “control total”. That, in effect, is a financial target premised on the provider showing a quarter-by-quarter improvement in its bottom line income-and-expenditure position – either through reducing its deficit or increasing its surplus.

There is ultimately only one way a provider can consistently do that, and that is by reducing the average costs of caring for each patient it treats down towards the level funded in the tariff (or below it, in the case of providers who are set a target to report an underlying surplus).

For trusts this year, that will mean real-term cuts to their spending per patient of 4.2%.

If a provider succeeds in that, it will receive a share of the STF cash. But here it bumps into the major catch: it will not be able to spend it. Sure, if the provider is in deficit, it can use its lump of the STF to reduce its need to borrow from the bank. But it cannot use the cash to increase its current spending beyond what it would have been without it – such as by employing more doctors or nurses. After all, if a trust spends its STF cash, it will immediately increase its expenditure for the year. That will worsen its income-and-expenditure balance and, in so doing, breach its control total.

When having extra cash means having to spend less

The counter-intuitive nature of this is perhaps most clear for the 80 or so providers who received over £700 million of the fund in 2016/17 after meeting control total targets to produce a surplus.

The sustainability funds have a longer-term implication beyond the short-term task of offsetting deficits. By tying receipt of cash to the achievement of targets to cut provider costs and drastically curtail commissioner spending growth, the funds cajole NHS organisations to permanently scale back their expenditure so that they may be weaned off the “extra” funding altogether.

They too were unable to spend that £700 million, because doing so would immediately cause them to breach the income-and-expenditure “control total” on which the receipt of the £700 million was premised. At the end of the financial year, the £700 million simply sat in their bank accounts, neatly reducing the net deficit of the sector overall, but doing absolutely nothing to increase what those trusts were able to spend on patient care.

This is the “pound-for-pound benefit to the bottom line” principle around which both the provider and the new commissioner sustainability funds are based. In practice, it means a combined £2.85 billion of the total NHS budget next year – of which £1.05 billion will come from the November budget increase – will be dedicated to plugging deficits by temporarily increasing the income of individual providers and CCGs. It will do so by dolling out lumps of extra cash that categorically cannot be spent on extra care, beyond what would happen without it.

As NHS England’s guidance on the commissioner fund makes clear: “the CSF provides allocation funding for expenditure we would expect to take place anyway and reduces the deficit which would otherwise arise, rather than providing a source of funding for additional investment in the health economy.”

But the sustainability funds have a longer-term implication beyond the short-term task of offsetting deficits. By tying receipt of cash to the achievement of targets to cut provider costs and drastically curtail commissioner spending growth, the funds cajole NHS organisations to permanently scale back their expenditure so that they may be weaned off the “extra” funding altogether.

As Paul Baumann, Chief Financial Officer for NHS England told his board: organisations receiving sustainability funding should view its receipt as “non-recurrent”.

After all, come 2019/20, NHS England’s budget is set to increase by just 1.6% (in cash terms). That means it would be crazy to allow the Chancellor’s £1.6 billion to be fully absorbed into day-to-day spending in 2018/19, as that would simply exacerbate the scale of cuts needed in 2019/20 as real-terms funding per patient falls.

The approach taken then – necessary given the spending settlement for the year after next – is the equivalent of a parent who gives an errant offspring £1,000 to plug the gap between their £20,000 earnings and £21,000 spending habit. However, they do so only on the basis that the offspring does not then spend the £1,000, but use it instead to reduce their overdraft while they get their act together. The parent’s intention here would be quite clear: they cannot offer a fresh £1,000 sub every year, so the offspring must cut their expenses to fit their means.

The next two years

But cutting the NHS’s expenses to meet the means currently afforded it by the Treasury entails that, in 2018/19, NHS providers will likely be asked to make a further 4% real-terms cut in their spending per patient – the eighth successive year of such asks: 4% after 4% after 4%.

Meanwhile, commissioners in deficit – and there were at least 95 of them by December just gone – will be asked to slash the rate of their spending increases to at least a percentage point below the level at which demand for NHS care is growing. This will require, as NHS England says, “difficult choices to be made”. Treatments banned, or more tightly rationed; quality improvements foregone; staffing levels cut.

There is a view among some senior NHS figures that this approach is necessary to show the Treasury – in advance of a hoped-for funding boost come a Spending Review this autumn – the necessary “financial grip” can be restored and the NHS made to live within its means.

But the risk is that this strategy boils down to asking the NHS to deliver the impossible, to prove it’s impossible. It might be more apt to suspend belief in genuine extra funding until it actually appears.

In the past decade of austerity, NHS spending has fallen as a share of national wealth, despite the population becoming older and our expectations for modern health care (quite reasonably) rising. As it stands, the approach suggested by the sustainability funds raises concerns that the Treasury continues to believe that the NHS deficit problem should be fixed by the service spending less, rather than its recurrent funding increased.

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