Last month 75% of NHS providers and 95% of hospitals were reported as being in deficit at the end of quarter three with an overall provider sector deficit of £2.3 billion. This was followed by a report from the Health Foundation which explained how such a large and widespread deficit has been run up so quickly, pointing to three factors – staffing, the tariff and a demand/funding gap.

Systemic issue

First, the response to Francis requiring more staff when permanent supply was not available, leading to £2.7 billion of unplanned and unfunded agency staff spend in the first three quarters of 2015/16 alone. Second, setting an unachievable 4% tariff efficiency factor four years in a row.

Third, the gap between NHS costs and demand continuing their inexorable 3.5% to 4% annual rise but NHS funding only increasing by an average annual real terms 0.9% over the last parliament.

Providers would certainly agree with the report’s lead author that “this is not a problem created by poor financial performance at organisational level, but rather a systemic issue affecting the vast majority of providers. The events, reforms and policies…[of]…recent years have created a climate where it is nearly impossible to maintain a balanced budget while maintaining quality of care and meeting rising demand”.

So, where next?

The front loaded spending review settlement and its £3.8 billion real terms 2016/17 increase has created a £1.8 billion sustainability fund and the first realistically deliverable tariff for five years. But we need to be honest about how far this will get us.

The best 2016-17 outcome we can currently envisage is reducing the aggregate provider sector deficit to £500 million

The real provider sector deficit, after central financial support, capital/revenue transfers and balance sheet adjustments, is nearer £4 billion than three. And providers will have to absorb an extra £1 billion pension related national insurance costs, though this is accounted for in the tariff.

That’s why so many providers were cautious about signing up to 2016/17 control totals that some felt required unachievable levels of savings.

Their caution has only been increased by events over the last three weeks as the clinical placement tariff will be cut by 2% and aggressive assumptions are made on specialised commissioning CQUIN. Together these will give one trust already looking at a 4% cost improvement programme, a further £5 million hole to fill, undermining the commitment to provider financial stability in 2016/17 we all thought we were working to.

Given all the above, the best 2016/17 outcome we can currently envisage is reducing the aggregate provider sector deficit to £500 million. Returning the sector to surplus will require another year and further significant sustainability funding in 2017/18.

Avoid thin margins

What more is required? We need to stop pretending that we can run NHS finances on wafer thin margins. We will have used up nearly all the remaining spare back pocket money and balance sheet flexibility getting through 2015/16.

Yet, over each of the last three years, there has been a £0.5 to 1bn in year deterioration in provider side finances. Given the pressure on the NHS, stuff happens in year, it hits provider finances, and we need to provide for that.

We rapidly need more clarity on how the £22bn savings required will be realised. By this time in the last parliament we had a Nicholson challenge, clear areas for savings with target levels for each, a profile for each year of the parliament and providers knew what was expected of them.

We must also treat elimination of the provider deficit as a whole system problem

Useful work has been done on the Carter review but providers think only £3 billion of the £5 billion identified is deliverable. And what about the rest?

We need to be more honest about some of the forward assumptions we are making. Demand management schemes have a poor track record in the NHS.

There is great work in the new care models programme but this will take five to 10 years to consistently deliver, not three to five. Service reconfigurations also always take much longer, cost more and need more political capital to implement than planned.

So assuming we will make significant savings from these areas in this parliament is setting ourselves up to fail.

We must also treat elimination of the provider deficit as a whole system problem. Too many of our members seem to have spent too much of 2015-16 arguing with clinical commissioning groups about provider fines and whether they will be reinvested; about what the real terms commitment to increasing mental health spend actually means; and, more recently, trying to fend off attempts to subtract levels of money equivalent to sustainability funding from 2016-17 contracts.

Our members also want a clear demonstration that CCG finances are being as tightly managed as provider finances.

If this wasn’t difficult enough, we have the rapidly looming iceberg of the middle years of the spending review. We told the Health Select Committee this week that it is wholly unrealistic to expect the NHS to deliver current levels of care, transform, and meet the extra policy commitments already made, on real terms increases of just 0.3 per cent and 0.7 per cent in 2018/19 and 2019/20. Particularly given the financial problems the social care sector is now facing.

So, whilst there is a just about believable plan to reverse the provider sector car out of the financial ditch over the next two years, it’s difficult to see how we can avoid the car heading straight back into the ditch once the frontloaded settlement runs out. Dropping NHS spend from 8.8% of GDP in 2009 to 6.6% in 2020 carries huge risk.

We really do now face a choice for 2018/19 and 2019/20 of investing more in the NHS in those years or reducing the service we provide to meet the budget available.

This blog was published by HSJ on 15 March 2016