News / News analysis: Fair shares

The NHS is built on the principle that everybody should have equal access to good services. The fundamental starting point for delivering on this is to ensure that all areas get a fair share in funding. NHS England believes that this year it has taken a major stride towards getting this core foundation in place.

The NHS has long used a capitation formula to set targets for local commissioning budgets, taking account of the age and need of local populations.

The key word here is ‘targets’, with commissioners effectively moved from historical allocations towards their fair share target at a pace determined by a ‘pace-of-change’ policy.

From time to time, formulae have been revised, resetting target allocations. Differential growth, giving a minimum increase to all commissioners and additional growth to

under-target bodies, would then move commissioners towards those fair shares. But in times of low overall growth, the pace of change has tended to slow to glacial levels.

In recent years, however, despite the clear financial difficulties facing the service as a whole, NHS England has upped the ante on pace of change. It set a goal of bringing all clinical commissioning groups (CCGs) receiving less than their target funding to within 5% of target by 2016/17.

New allocations published in January not only make good on this, but also give commissioners greater certainty by setting budgets for five years (three years of firm allocations and two years of indicative figures).

The rules governing pace of change for CCGs are complicated. Each CCG should receive a minimum per capita growth (equivalent to real-terms cash growth at average population growth) and minimum cash growth equivalent to real-terms growth plus specific policy pressures, unless the CCG is more than 10% above target (with the cap phased in from +5%).

And this is then further complicated by new ‘holistic place-based targets’ that take into account both primary medical care and specialised services.

However, the core of the policy is that any CCG that is more than 10% above target receives flat cash bar policy adjustments (with the pension cost increase being the main one). CCGs between 5% and 10% above target receive some growth on a sliding scale.

Mean growth for CCGs is 3.74% with a median (the growth rate received by more than 40% of the 209 CCGs) of 3.05%. There are lower increases for the following three years before an increase again in the figures for year five.

But the focus on bringing all under-target CCGs to within 5% of target means big differences in growth at the local level – with nearly an 8.5 percentage point spread between the lowest and highest growth figures.

Six CCGs will receive the minimum cash growth of 1.39% – Sunderland, Isle of Wight, Camden, Hammersmith and Fulham, West London and Central London. Meanwhile Bedfordshire receives 9.65% and Corby 9.40%.

Bedfordshire CCG welcomed the allocations, which will see it move to its fair share of funding over the next five years. However, the CCG already faces financial challenges. A cumulative £45m deficit reported in 2014/15 led to NHS England placing it under legal directions. The CCG is now on track to meet its financial commitments for the current year but said that ‘historic underfunding will have been one of several contributory factors in the financial difficulties we faced last year’.

It pointed out that its starting position – or closing distance from target (DFT) for 2015/16 – was 8% under target, which equated to underfunding of £40m on its £500m budget.

‘The benefit of growth next year will help consolidate our financial position so that we can continue to provide good quality healthcare in the future,’ a spokeswoman said.

Many CCGs contacted by Healthcare Finance during January said they were still analysing the figures. That’s understandable. The underlying data in the formula has been updated, with activity data brought forward by four years and model parameters re-estimated.

There have also been changes to further address inequalities – in particular a new sparsity adjustment and a refresh of the emergency ambulance cost adjustment. And a CCG’s population growth relative to the average will also have an impact on annual allocations. All in all, it is a complicated picture.

And all CCGs face challenges in agreeing contracts. For example, NHS Kernow, covering Cornwall and the Isles of Scilly, is already forecasting a deficit this year and is working with NHS England to develop plans to improve the position. Its growth for 2016/17 equates to an increase of £21.6m.

‘Nevertheless, the current level of spending, and the likely increase in future demands and costs for services, mean that setting and agreeing our financial plan for next year will be challenging,’ said CCG chief finance officer Simon Bell.

‘In addition to the financial plan for next year, we will be working with local providers, the councils and other stakeholders to develop a community-wide five-year sustainability and transformation plan that will co-ordinate our ideas across the system to deliver local healthcare for the future.’

Sunderland is one of the six CCGs facing minimum growth – courtesy of its above 10% DFT. In fact, the changes to the allocation formula moved its 2015/16 closing DFT from 12% to 18.6%.

And while it had been planning on the basis of limited financial growth for the next three years, it said it was disappointed with ‘one of the biggest negative shifts in distance from target in the country’. Most CCGs, bar those affected by the rurality adjustment, saw changes of 1%-2%.

It receives slightly more than minimum growth for primary care. However, a spokesman said that with the hybrid DFT at 13.9%, it was still looking at being over the 10% minimum growth ceiling for the next five years. ‘As such, we will be the only CCG outside London to receive real-terms cuts in funding,’ he said. He added that the CCG had begun working with NHS England to understand the shift in target and that it was ‘appreciative of the support received to date’.

A January board paper suggested that the reduced allocation growth, combined with the reduced provider efficiency in tariff and anticipated demand increases, would require ‘an additional £20m of allocative efficiencies over the next three years’.

‘The CCG does hope that, given the significant financial challenges facing commissioners and providers in Sunderland, our sustainability and transformation plan will be viewed positively by NHS England,’ the spokesman added.

The introduction of a sparsity factor in the formula results in an adjustment for six CCGs in relation to eight hospital sites. According to NHS England, the adjustment totals £31m, with a range across the six CCGs of £2.6m to £14.2m. The impact on actual allocations in any year is dictated by the absolute DFT and pace of change.

Cumbria was highlighted by NHS England as one of the areas to benefit from the decision to factor in the unavoidable pressures of rurality and sparsity.

However, the impact is complicated. The CCG’s DFT has reduced from a closing DFT of 6.5% (using old formula) to a recalculated 2% with the new.

Thirteen different issues contribute to the change, moving the target in both directions. The single biggest impact is from the refresh of the formula regarding need and commissioning patterns. The new sparsity adjustment equates to 2.1 percentage points of the 4.5% reduction, with a refresh of the emergency ambulance cost adjustment also benefiting the county.

While still over target, the reduction in DFT brings the CCG down into median growth territory. Its DFT stays below the key 5% over-target threshold for the five years.

However, with estimated flat population growth, compared with an average of around 0.7%, its DFT creeps back up to a final closing DFT of 4.3%. It may be complicated, but the recognition of sparsity is seen as a breakthrough for areas with remote populations.

The allocations mark a major step towards the allocation of fair shares. An updated formula, new sparsity factor and an aggressive pace of change policy all move money around. Full understanding of what the allocations mean for 2016 and the years ahead will take some time yet.