News / News analysis: If the cap fits

Temporary staffing – and in particular the high cost of agency doctors and nurses – has continued to be the focus for concerns about the rising deficit in the NHS.

Overall Q1 figures show providers had a year-to-date deficit of more than £900m for the first three months of the year – bigger than their final deficit for the whole of 2014/15. And both FT regulator Monitor and the Trust Development Authority singled out agency staff costs as the chief cause for overspends against plan.

The £900m has caused some shocked responses. But to get a sense of how the position deteriorated over the first part of the year, it needs to be compared with the planned position. Providers expected to have run up a deficit of £766m by the end of the quarter and so their actual results suggest they are £164m off their expected performance.

Looked at separately, foundation trusts overspent by £90m against plan (a deficit of £445m compared with a planned deficit of £354m), while trusts overheated by some £73m (£485m against plans of £412m).

On the back of these figures, foundation trusts are forecasting a year-end deficit of £1.01bn, which would be £80m worse than the planned full-year deficit of £931m. No year-end projections have been given for NHS trusts, although it would seem a safe bet to assume that the overall projected outturn for all providers would be slightly above the unofficial planned deficit of around £2bn.

Of course a variance from plan of £164m is significant – but it is this figure that needs to be explained in looking for how plans have deteriorated (or how robust plans were to start with), not the overall Q1 deficit.

Both Monitor and the TDA are clear about the main culprit – agency staff costs. Looking at the far more detailed financial figures for foundation trusts, the case looks solid. Foundation trusts overspent their agency staff budget by £192m – the single biggest individual budget variance for the quarter.

As it happens they also overspent on overtime and bank costs by £78m. However, some of these costs were offset by the underspend on permanent staff resulting from the vacancies that the agency staff were needed to fill. This £213m underspend means there was a net overspend on pay of £59m or 0.8% of total planned pay spend.

In numbers terms, foundation trusts had a combined shortfall in permanent staff of some 6,450 whole-time equivalents (WTEs). To compensate for this, they hired some 7,200 additional agency staff. That means they employed 752 more staff (0.1%) than planned during the quarter. These additional staff are a straight cost pressure on the pay budget, especially as they come at premium agency rates. And the 6,450 agency staff filling vacancies in permanent positions add a cost pressure equivalent to the difference between permanent pay rates and agency costs.

The additional pay costs hit the EBITDA margin (earnings before interest, taxation, depreciation and amortisation), which was 0.9% for the quarter – lower than the planned 1.5%, which itself was significantly lower than the level achieved in previous years. Acute foundations actually reported an aggregate negative EBITDA for the first time.

The extra pay costs also had an impact on trusts cost improvement programmes – with 65% of the £64m shortfall in CIPs during the quarter being pay-related.

Some of the costs are unavoidable because permanent staff are not available. The Carter efficiency review recognised that there was a real pressure on nurse staffing, which cost £19bn in 2013/14. Agency nurse spending has doubled in the past two years driven, it claimed, by an increased focus on safer staffing and a 29% increase in the rate of nurses leaving the profession. Across all professions, agency staff cost about £3.3bn last year.

But Carter also suggested that not all trusts are managing existing staff as well as they could. On some days there were simultaneously too few registered nurses for the patient count but more overall staff than required. Non-productive time varied, there was ‘considerable variation’ in how hospitals manage specialling (one-to-one nurse care) and bank remuneration policies (in particular not paying on weekly basis) provided incentives for nurses to work through agencies.

Much wider use of e-rostering is seen as important in helping trusts maximise the value from their workforce, helping to avoid unnecessary agency costs where possible.

Greater use of NICE safer staffing guidelines – which propose much greater daily awareness and matching of staff numbers to both patient numbers and acuity – are also seen as part ofthe solution, rather than an adherence to crude staffing ratios.

Salford Royal NHS Foundation Trust has also tested different approaches to specialling which it believes could save over £1m a year.

Where trusts need to use agency staff, Monitor and the TDA want to keep the rates down to a minimum. They have already targeted this with new controls on trust spend levels and framework agreements – compulsory for all NHS trusts and for foundations in receipt of interim support or in breach of their licence for financial reasons.

But these have been followed up with price caps on the hourly rates that can be paid for all agency staff. The proposals are now out for consultation. Together the Department of Health believes these measures will remove £1bn from agency spending bills over three years.

In effect the caps take national pay rates and add a percentage uplift to allow for employment on-costs, such as employer pension contribution, employer national insurance, holiday pay and admin fee. The caps would be phased in and so there would be a partial impact this year. But the aim is that by April next year, no trust would be paying more than 55% above the relevant national pay rates.

Given that trusts broadly face these on costs for permanent staff, the claim is that this would mean the capped national rates are ‘equivalent to national NHS pay rates for substantive staff’.

Reaction has been mixed. George Batchelor, a former head of pricing at Monitor and now associate director at NERA Economic Consulting believes the price cap won’t improve finances and may even exacerbate some problems. In an online blog, he writes that price caps are usually applied to the price an organisation charges, not the price it pays and that the caps could in fact become a target price.

‘Setting a cap at any rate will tell people how much they could potentially charge in the agency market,’ he says, adding that this could also flag up to staff how much they could earn by going ‘agency’.

Suggesting the proposals are driven by ‘needing to do something’, he says that intervention would be better targeted at improving supply or terms of employment for full time staff.

Agencies representative body the Recruitment and Employment Confederation believes agencies are being scapegoated for ‘years of poor workforce planning by the government’. Typical rates, it argues, mostly within framework agreements, already equate to those paid to permanent NHS staff, once the shifts and training costs are taken into account.

However, trusts’ representative body NHS Providers sees the caps as ‘another important tool’, although trusts believe implementation will be ‘difficult and complex’. ‘The success of any agency rate cap will depend on all providers adopting and adhering to it,’ said the organisation.

It highlighted three issues of concern: