News / Winter blues, financial reds

Nobody should need evidence that the NHS has faced one of the most challenging winters on record. The impact on demand for hospital services and performance, measured largely in waiting times, has been all too clear. But providers’ nine-month figures provide further confirmation and show the financial consequences of this sustained pressure.

NHS Improvement was quick to point out the unprecedented pressures facing providers – pointing to one of the ‘toughest winters on record’. There was recognition and gratitude for the hard work to ‘improve finances and deliver quality health and care’. 

But this came with a clear message that providers needed to go even further to improve their financial positions. Current forecasts were ‘both unaffordable and unsustainable’. 

HFMA director of policy Paul Briddock (right) said it was clear the mounting pressures over winter had taken their toll on services. ‘The NHS workforce is trying hard to deliver services, efficiencies and value – but is now being pushed to the ultimate limit,’ he said. 

Keeping services going while delivering over £2bn of efficiencies to date was ‘remarkable’, but the increase in demand and activity meant that ‘hospitals are simply being overwhelmed’.

The Q3 report highlighted that 200,000 more patients attended accident and emergency departments between October and the end of December than the same period last year. There was also a 3.5% increase in the number of patients requiring major further in-hospital treatment. 

This led to underperformance on key standards – just 86.74% of patients seen within four hours in A&E, for example – and to the postponement of elective care. And the pressures were further compounded by a 28% increase in ‘lost bed days’ – lost because medically fit patients couldn’t be discharged due to constraints on community or social care.

The demand has translated directly into financial performance. Overall, the provider sector as a whole is reporting an £886m deficit at month 9 – £202m more than planned at this stage in the year. 

The forecast for the year-end is an overspend of £873m, some £293m more than the £580m deficit plan – although NHS Improvement believes that the position could improve.

Chief executive Jim Mackey (right) highlighted the loss of elective income as a result of the focus on emergency treatment. ‘Despite this, the sector’s financial position is £1.3bn better than at the same point last year,’ he said. 

‘In addition, 135 providers ended the quarter in deficit which is 44 fewer compared to the same period last year.’

However, the impact of recent service pressures was clear, with a £238m deterioration in overall position in the third quarter alone. And looking at the provider level position, these organisations were £435m overspent compared with plan (on a control total basis) at the end of December and are forecasting a year-end deficit of £1,410m – some £621m worse than their combined planned deficit of £789m.

This is offset by £113m of technical adjustments and £424m of undrawn sustainability and transformation fund (STF) to give the overall sector position The undrawn STF money includes £239m that had been allocated to providers but is now held centrally as providers have failed to meet key funding criteria.

NHS Improvement acknowledged that providers have been ‘responding to unrelenting demand for hospital-based emergency and urgent care’ since April. These pressures – heightened over the winter – have pushed operating costs up by 1.4% more than plan. However there has not been a corresponding growth in revenue, which has only grown by 0.5% above plan.

Pay has been a major focus for the NHS over the past 12 months, with a specific push to reduce agency staff spend. In total pay was 0.8% higher than plan at month 9 – although this reflected a relatively minor £43m underspend (0.1%) on permanent and bank staff and a £359m overspend (19%) on agency and contract staff. This means agency costs now reflect 5.9% of total pay costs compared with the planned level of 5%. 

Providers were forecasting a year-end £118m overspend on permanent staff and a £488m overspend on agency – which would mean a 1.2% overspend on staff overall.

However, NHS Improvement said this still reflected improvement. Year-to-date agency expenditure was £505m lower than in the same period last year, when agency costs stood at £2.7bn and represented 7.5% of total pay costs. Two-thirds of trusts have reduced their agency spend since agency rules were introduced in October 2015.

If trusts remain on their forecast trajectory, by the year end, the year-on-year reduction in agency spend will reach £771m. However, the forecast outturn agency spend would still be £488m above plan and £418m above agency expenditure caps. 

NHS Improvement has promised new rules to ensure providers stay focused on this agenda. These will include requiring chief executives to sign off all shifts costing more than £120 an hour.

Overall, the full-year forecast for pay would mean pay costs had grown by 3.3% compared with the planned level of 2.3%. This reflects the need for additional staff to manage the extreme winter pressures. 

However, the oversight body also highlighted analysis suggesting a reduction in real-terms pay costs per weighted activity unit. This suggests that, while the workforce may be costing more in absolute terms, it has become more productive or the average cost per employee has reduced.

Acute activity growth of 2.2% is identified as the key driver behind a £495m overspend on non-pay budgets at month 9. 

Drugs and supplies make up nearly half of this overspend, with percentage increases close to the activity growth. But the overspend on consultancy is a more dramatic 13%, although it only amounts to £21m.

Capacity constraint is an increasing issue. Trusts have so far spent £123m on waiting list initiatives and £302m on outsourcing to other providers. Outsourcing is a particular cost pressure, with providers expecting a full-year spend of £402m.

Delayed transfers of care – 28% higher than last year – are also having a damaging impact, both operationally and financially. Three-quarters of the way through the year, these delays have cost providers £124m directly and could reach £169m for the full year – £24m more than last year. And these costs are, in fact, likely to be ‘much higher’ than estimated, according to NHS Improvement.

Continuing the consistent message of most trusts ‘doing well but need to do better’, providers delivered £2bn of savings through cost improvement programmes (CIPs) during the first nine months – reducing total year-to-date expenditure by 3.3%. While this was £101m more than the first three quarters last year, it was still £207m short of plan. Shortfalls of £217m and £66m on planned pay and non-pay savings were offset by £75m over-performance on income generation schemes.

Three quarters of the savings were through recurrent schemes, below the planned 92% level, with an increase in non-recurrent savings making up the slack. At the year-end, providers expect to deliver savings of £3.14bn, which would be £229m below plan.

NHS Providers chief executive Chris Hopson described provider CIP targets as ‘unrealistic’ – typically 4%. ‘This is double what was originally intended and it leaves no margin to cope with the inevitable pressures that emerge during the year,’ he said. ‘It’s no surprise that some trusts fall short.’

An ‘intensive review’ process before the figures were published saw providers’ initial
full-year deficit forecast of £973m reduced by £100m. And NHS Improvement believes that a number of measures in the final quarter will help to bring the final forecast deficit into the range of £750m to £850m. This is close to the £800m risk reserve that commissioners have been required to set aside.

These measures include a possible expansion of NHS Improvement’s financial special measures programme to a further 12 trusts. It is also working with providers to help them recover elective losses.

More generally, it is promising to focus support where it is most needed. Although all trusts face major financial pressures, there are 121 currently forecasting a deficit. Some 74 are forecasting a collective overspend against plan of £492m, and £280m of this is attributable to 13 providers. These trusts will be subject to more stringent oversight. A number of land and property transactions may also provide some non-recurrent improvement.

Summarising the views of many commentators, Richard Murray, policy director at the King’s Fund, said: ‘There is no doubt these are worrying figures that highlight how serious the NHS’s financial position is, both in this year and the years ahead. Even if the Department of Health manages within its spending limit this year, the prospects for the rest of this Parliament are extremely challenging.’

Thanking ‘most providers’ for their hard work to improve finances and deliver high-quality care, NHS Improvement’s Mr Mackey added that the job was ‘not done yet’. 

With many cost improvement programmes phased to deliver more in the final quarter anyway, and January’s continuing service pressures yet to be factored into reported figures, that might count as one of the year’s biggest understatements.