News analysis: Balancing act

NHS providers ended 2017/18 with a £966m deficit and, with operational targets missed

and the scars of a difficult winter still fresh, it was a relatively gloomy financial year end. But look behind the headline figures and there is cause for optimism, with extra funds this year, a new five-year funding settlement due to begin in 2019 and a long-term plan in development, according to NHS Improvement’s chief financial officer, Elizabeth O’Mahony.

‘Some people might say that a £966m deficit was a poor performance against a planned deficit of £496m. But we saw some of the greatest operational pressures in history. More than two-thirds finished the year on target for finances or better,’ she said. ‘Boards did their utmost to deliver the financial position. While it was not on plan, it was better than I anticipated at the end of Q3.

‘So they turned it around in the last quarter, albeit through non-recurrent measures, which have been a theme of recent years. I have the privilege of working with the finance community, not just at national level, but out at the front line. I sense a strong community that my team and I are proud to be part of.’

Overall, with the provider sustainability fund boosted by £650m to £2.45bn, NHS Improvement is aiming for a balanced financial position in 2018/19. However, Ms O’Mahony, speaking to Healthcare Finance, accepted further work was needed to achieve this. ‘We expected to start the year with a balanced plan, but it won’t be a surprise to hear that we haven’t achieved this. At the end of Q1 we will be forecasting that we are on plan, but the plan is not balanced and therefore not affordable.

‘NHSI and NHSE teams have during the summer been working with the most challenged systems to identify actions to close the residual gap.

‘This work has also identified opportunities for financial improvement in some organisations and systems that are already meeting their control totals.

‘We are almost there in closing the planning gap. To achieve this, however, we have developed a number of local incentives and opportunities that will help us move the dial,’ she said.

Some of these incentives are being considered by the Quad (NHS Improvement, NHS England, the Treasury and the Department of Health and Social Care). ‘Hopefully, we will be able to communicate these more widely shortly.’

While the results at Q1 are not affordable it is important to recognise the intense operational pressure in the service, she added. 

‘Yet again, we missed the operational targets, but our staff saw more patients in under four hours and treated more patients within 18 weeks than in the same period last year. Once again, the increased demand in emergency admissions is a financial pressure.’

Ms O’Mahony is reasonably positive about the preparations for the coming winter, which have started earlier and build on last year. But she added: ‘In Q1, there was a 9% increase in vacancies and, consequently, an overspend in temporary staff. It’s still at or around last year’s level, but our ambition is to reduce the level of temporary staffing this year further.’

Local systems must continue to bear down on high bed occupancy and delayed discharges and reduce emergency admissions, as it is affecting the sector’s ability to admit patients needing planned care. ‘Extra beds are not the solution in all places as we simply don’t have the additional staff, but there is a lot of scope to use the existing bed base better if we can improve flow.’

The Q1 report (due this month) will also broach the issue of the underlying deficit. This is the level of deficit at the beginning of each financial year due to non-recurrent actions and full-year effects in the previous year. In 2017/18 non-recurrent measures saved £842m, compared with a planned £316m.

‘We need to transparently consider the underlying position as 2018/19 is the platform for the longer-term plan. It is essential that a balanced plan is prepared and delivered, but we are already playing catch up.

A lot of this is because last year there was an increased level of non-recurrent savings,’ Ms O’Mahony said.  

NHS Improvement will provide help. ‘It’s all very well saying the sector needs to get to a balanced plan, but we need to ensure these issues are widely understood and trust boards are supported to take the necessary actions and manage risk as any shortfall in delivery has implications for next year,’ said Ms O’Mahony.

Local organisations are working in partnership and NHS Improvement and NHS England are also moving towards shared structures and leadership with a common set of objectives. She insisted the joint national
and regional structures must be set up quickly and not distract from the development of the
10-year plan and making the most of the five-year funding settlement.

‘The funding settlement is welcome – it averages 3.4% over five years – but we all know it’s not sufficient for us to continue to do everything in the same way.’

Working groups

Seventeen working groups have been set up to shape the 10-year plan. Ms O’Mahony is leading two of them – funding and financial architecture, and capital and infrastructure – but she believes the groups cannot work in isolation as many of the issues under discussion are interdependent. A change in one workstream area is likely to impact another. ‘We have to be careful – a substantial shift in the financial architecture at the same time as the NHS is reforming could destabilise the position,’ she said.

It is widely agreed that the two-year tariff has built stability in the service and NHS Improvement and NHS England will not want to endanger that stability. This is one reason for the delay in publication of the tariff engagement document. This will now be published alongside the 10-year plan to ensure the tariff and the long-term plan are not contradictory.

And with work on the 10-year plan amounting to a game of four-dimensional chess, it is understood that different timescales for the delivery and business plans are being considered – including one year plus four, two plus three or three years plus two. ‘It will have wide ramifications and we have to do things the right way around,’ Ms O’Mahony said.

The funding and financial architecture working group is also looking at areas such as the future of control totals, CQUIN, MRET, readmissions and material financial aspects of the standard contract.

‘The scope of the review is extensive, and we are considering all aspects of the financial architecture as they have evolved over time and were designed for a different environment.

‘We need to simplify the financial framework and change some of the levers that are now out of date. While we do this, however, we need to understand how the changes will impact commissioners, providers and systems.

‘It is a great opportunity, but equally daunting as there are numerous interdependencies and complexities. I don’t want to do something that destabilises the sector because it is rushed. It is therefore essential that we engage with key stakeholders to consider the proposals at the earliest opportunity,’ Ms O’Mahony added.

She believes the tariff has a future as it is used in several ways. It has driven improvements in costing, supported pathway redesign and incentivised best practice, she said.

But further reform of the payment system will be necessary if it is to support delivery of the long-term plan and local system collaboration. Ms O’Mahony believes there is much to learn from local approaches in developing the national approach.

She said: ‘I think a tariff-based system has its benefits, but I am concerned about the integrity of prices, particularly in urgent and emergency care, as we know that there is a substantial scaling factor, and the tariff baseline has not kept pace with the average cost of delivering care.

‘For some providers, the headline efficiency opportunity does not appear to cover their deficit and we need to consider if this is down to structural issues, local system issues or the management hasn’t taken all the action it could. But for many organisations the tariff is not covering costs.’

Some finance professionals believe control totals are coming to the end of their usefulness. Asked whether they have a future, Ms O’Mahony said: ‘We will not roll forward the 2018/19 control totals a further year as they were based on a 2015/16 baseline. But we have already engaged with stakeholders from across the service and the general sense is that a stretching, but realistic, control regime is helpful in the current environment.

‘The trick here is to ensure, by also changing the financial architecture, organisations feel they are structurally better off, and we must have a different approach for those trusts in surplus.’ 

However, with transformation and addressing underlying deficits, they will become less relevant over time. ‘I strongly believe that as we transform in the way we will be describing in the long-term plan, we will phase out control totals and move to an approach around earned autonomy,’ said Ms O’Mahony.

It’s been a busy summer and it’s unlikely this will let up in the autumn, but NHS Improvement and NHS England will hope the work done now will provide a stable platform for the future. 

Finance support