The NHS financial regime: cleverly flexible or horribly messy?

This post is from The King's Fund Blog

The broad theory behind the NHS financial regime set out in the 2012 Health and Social Care Act built on experience garnered over the previous decade. Autonomous local commissioners would lay contracts with similarly autonomous providers (on a level playing field between NHS and private providers), paid for at nationally set prices (tariffs). These tariffs already existed (mostly for the acute sector) or were meant to progressively expand to cover a wider array of services.

Fine-tuning went on around this national tariff, including introducing more prices based on supporting clinical best practice and additional incentives (cQUINs) to give commissioners a further set of financial levers at local level. The role of the ‘centre’ – as in the Department of Health or other national NHS bodies – was limited to some specialised commissioning (NHS England) or to overseeing the tariff itself (Monitor, as was, with NHS England). If NHS providers were not solvent under this system, the new failure regime was ready to take them over, as happened to the South London Healthcare NHS Trust (subsequently broken up in 2013) and the Mid-Staffordshire NHS Foundation Trust (subsequently broken up in 2014).

From the perspective of 2017, this approach to financial management sounds like another country. Some areas are increasingly abandoning tariffs in favour of block contracts, while others are beginning to experiment with fundamentally different payment systems, many viewing capitation (where payment is based on the number of people covered by the service, rather than the number of treatments provided) as the way forward.

Just as striking has been the return to large-scale direct financial intervention from the centre, reversing the long-standing trend towards mainstreaming most new money through to clinical commissioning groups (CCGs) (or primary care trusts, before them). This change is made up of two parts. The first is the money from the well-known Sustainability and Transformation Fund, designed to reduce NHS provider deficits and then (in some hoped-for future) to switch to paying for the costs of transforming services. Its success in reducing the reported national provider deficit is well known. What is perhaps less obvious are its implications for individual organisations and their financial independence.

For example, the biggest winner in terms of Sustainability and Transformation Fund payments was Barts Health. Receiving more than £46 million from the fund helped pare its 2016/17 deficit from £115 million to £69 million. Was the second biggest payment (more than £44 million) similarly designed to reduce the deficit of a troubled provider? No, it was not. The lucky winner was Central Manchester University Hospitals NHS Foundation Trust where it had the effect of increasing its surplus from an already healthy £12.7 million to a positively overflowing £56.8 million. The next biggest pay-outs went to University College London Hospitals NHS Foundation Trust (which got £41.7 million) and Guy’s and St Thomas’s NHS Foundation Trust (which got £38.2 million). Both were also already in surplus before they got any sustainability and transformation funding. At the other end of the spectrum the biggest deficit for the year was in St George’s University Hospitals NHS Foundation Trust (£73.9 million) which received no sustainability and transformation funding. Many already-in-surplus organisations received funding.

So, although the £1.8 billion Sustainability and Transformation Fund did bring down the overall deficit, its distribution across England was extremely uneven. For some it represented the difference between deficit and surplus: Royal Surrey County Hospital NHS Foundation Trust’s move from a £1.6 million deficit to a £21 million surplus being one of the more dramatic swings in fortune.

Readers may be asking themselves what happened to the likes of St George’s and Barts with their eye-watering deficits: how do the bills get paid when the cash runs out? This is the second part of the tale. They must turn to the Department of Health for a loan and our latest quarterly monitoring report noted that more than a quarter of trusts relied on non-Sustainability and Transformation Fund financial support from the Department in 2016/17. Of course, on current form, paying the interest (let alone the principal) on such loans must look well-nigh impossible to such organisations and the Department may have to switch the loans to public dividend capital (a sort of cash injection). But on the bright side, they may also turn out to be winners in the 2017/18 Sustainability and Transformation Fund payout and not need such help after all.

More recently the capped expenditure process (CEP) and sustainability and transformation partnerships (STPs) have emphasised that, to some extent, being an organisation with a healthy financial balance is not enough. Rather, your area (or STP) must also be in financial balance. Why is this? It is because the Department of Health is itself under threat of busting its budget and cannot afford to allow its largest area of spending (the NHS) to run a big deficit. Allowing extensive devolution to foundation trusts and CCGs was possible when the Department was sitting on large net underspends as these meant it could absorb the occasional deficit with ease. But when the money began to run out, the temptation to revert to command and control from the centre proved to be too great. Of course, whether you get better value for money through extensive national controls is another matter.

What we are seeing is the evolution of the NHS payments and incentives system as it has layered new rules over the old, trying to manage down deficits at the same time as introduce new models of care and ways to pay for them. This has been done though a piecemeal process of change, which, on the positive side, is able to adjust and flex to new needs and evidence. On the negative side, it has largely demolished the autonomy of foundation trusts, broken the payment system and left many wondering what comes next.

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