News / News analysis: Feeling the squeeze

Could it be that after three years of restricted growth funding, coupled with searching efficiency targets and the need to improve quality, the financial strain on providers is beginning to tell?

In its latest annual report on public expenditure on health and social care, the Commons health committee concluded that the NHS had achieved savings in the first two years of the £20bn QIPP efficiency improvement programme (also known as the Nicholson challenge) – delivering £5.8bn in 2011/12 and £5bn in 2012/13.

However, meeting the QIPP target was proving more difficult in 2013/14, with the NHS expected to fall short of the planned £4.2bn saving. This is in line with the King’s Fund quarterly financial monitoring report, published in January, which said the NHS would struggle to deliver the £20bn in efficiency savings by 2015. Only 47% of finance directors were confident of meeting their productivity targets in the 2013/14 financial year.

Health committee chair Stephen Dorrell said the environment was getting tougher. ‘The Nicholson challenge requires the health and care system to deliver fundamental change so that services are joined up and focused on the needs of patients.

‘What we have heard during our inquiry indicates that while many of the straightforward savings have been made, we have not seen the transformation of care on the scale that is needed to meet demand and improve care quality.

’The NHS budget is static, and the social care budget is falling. In these circumstances, the successful integration of high-quality health and care services represents a substantial and growing challenge,’ he said.

Nuffield Trust chief executive Andy McKeon said the MPs’ assessment was accurate. ‘This report is an important summary of where the NHS stands three years into an unprecedented period of financial challenges. Overall, our research and analysis support the committee’s conclusions.’

Unsustainable policies

He continued: ‘The NHS has met its headline targets, but it has relied on relatively straightforward ways to do so, cutting the prices paid to hospitals and freezing wages. These policies will not be sustainable over the next few years, and won’t provide enough savings to bridge the £30bn funding gap that NHS England expects to see by 2021.’

Monitor’s assessment of the sector’s finances at the end of quarter three shows 39 trusts in deficit, compared with 19 that planned a deficit at the start of the financial year (24 planned deficits in quarter three). Yet the regulator insisted the sector is doing well in a challenging environment. Overall, foundation trusts produced a net surplus of £135m in the first nine months of 2013/14 – £38m less than planned.

And operating revenues increased by £1.8bn compared with the same point 12 months earlier. About £660m of the rise was due to newly authorised foundation trusts and the merger of Great Western Ambulance Service NHS Trust and South Western Ambulance Service NHS Foundation Trust in February 2013.

Revenues were £687m above plan and Monitor analysis shows that the bulk of this comes from the ‘other NHS clinical’ line, which is £290m (5%) over plan. The regulator’s trust-by-trust analysis suggests there has been a significant level of ad hoc commissioner support. The largest individual variance is at King’s College Hospital NHS Foundation Trust and primarily relates to its takeover of Princess Royal University Hospital.

Elective inpatient activity has fallen and elective inpatient revenues dropped to 3% under plan (£71m). Monitor said that this could reflect the pressure from emergency admissions and the move to treating patients as day cases – there has been a 16% increase in day case revenue since last year.

Outpatient attendances are up 1.5% against plan, but revenue from this area is 4% over plan – suggesting casemix is different from plan and, possibly, more outpatient procedures are being performed than planned, the regulator said.

The Monitor report showed the effect of the 30% marginal rate for non-elective admissions – non-elective revenues were up by less than 1%, despite a 2% increase in activity.

However, operating expenses increased by more than revenues, with overall costs £776m (3%) above plan. The biggest variance is in contract and agency overspend, where the sector has spent £580m or 146% more than planned to date. Monitor said all trust types overspent on these costs – overall payroll for substantive staff was underspent by £181m (1%).

The greatest contract and agency overspends were in acute trusts (152% more than plan), followed by mental health trusts (141%). Acute trusts have the highest net overspend (2.6%) on pay as a whole and they have told the regulator that this is due to difficulty recruiting permanent staff, particularly nurses and middle grade doctors.

Poor workforce planning

While accepting this could be a factor, Monitor said the size of the agency and contract variance suggested poor workforce planning. Some trusts in special measures have said their pay costs have increased as they respond to the Francis and Keogh reviews.

HFMA policy director Paul Briddock said: ‘Monitor’s analysis of the Q3 position shows a worrying trend, with 39 trusts in deficit and 20 foundations potentially having additional commissioner support. This is masking pressures being felt, particularly due to contract and agency staff, which may be due to increased staffing requirements in response to quality initiatives, such as the Francis and Keogh reports.’

Pay costs could be about to rise. Health secretary Jeremy Hunt told a Commons health committee hearing on public expenditure: ‘We cannot constantly rely on the kind of pay restraint that we have had to date.’

The committee agreed, as did NHS Employers chief executive Dean Royles, who called for a smooth exit from the period of pay restraint. He said the expected 1% pay rise for NHS staff for 2014/15 would cost the service £500m but employers could not go on asking for pay freezes. They had to be innovative and look at multi-year deals or the introduction of a ‘living wage’. In return, employers could ask staff to accept more local discretion on increments and no veto on weekend work.

Foundations are also reporting a 7% increase in drugs costs, despite delivering 89% of drugs cost improvement programmes. Providers attribute 99% of the variance to volume rather than price changes. They said this was particularly the result of high-cost drugs that are reimbursable, but the regulator said it was difficult to verify this.

A report to the Monitor executive board in February highlighted the challenge facing providers in 2015/16 following the introduction of the better care fund. Modelling by NHS England and Monitor has concluded that the gap between costs and revenues will be equivalent to 6.6% of allocations.

Historically, providers have delivered true productivity and efficiency gains of between 1% and 2%, with the balance achieved through non-recurrent means. Providers may be feeling the squeeze, but with higher costs and lower revenues on the horizon, it may only just have begun.