HSJ’s weekly email briefing on NHS finances, savings, and efforts to get the health service back in the black
Treasury bent backwards
The Department of Health avoided a humiliating parliamentary process after blowing its revenue budget for 2015-16, but the extremely close shave means 2016-17 may be the last chance saloon for the NHS.
Although the health secretary will not have to return to Parliament to request a bailout (or “excess vote”) for overspending in 2015-16, it’s clear the Treasury has bent over backwards to get the DH over the line.
Not only did HMT provide another in-year bailout (of £200m) and allow another huge capital-to revenue transfer, but it was prepared to overlook what must be the handiest “administration error” in DH history, without which an excess vote would have been triggered.
So it seems very unlikely that HMT will be so accommodating this year.
It has already placed a firm grip on £1.8bn worth of provider funding, as well as £800m of commissioner allocations for this year, by requiring its own sign off before these funds can be spent.
If the situation continues to deteriorate, the grip is likely to extend further, and squeeze tighter. Meanwhile, some more existential questions may begin to be asked unless the balance sheets improve.
All eyes on providers
So what are the chances of improvement? How do things look compared to last year?
The DH and arm’s lengths bodies managed to eke out an underspend of just over £1bn from their central budgets in 2015-16, but much of this was delivered through one-off measures and will not be available this year.
To make matters worse, these budgets have been cut by about £1.4bn in cash terms – which was enabled by the sneaky tightening of the NHS ringfence in November’s spending review.
This is expected to be mitigated by another huge raid on the capital budget, of around £1.2bn, which has already been approved by HMT.
Similarly, the £675m underspend by NHS England and clinical commissioning groups in 2015-16 was largely thanks to one-off actions, and the commissioning sector is planning only for “financial balance” this year.
That leaves the provider sector, which overspent by about £2.5bn last year. After taking account of the £1.8bn of additional “sustainability” funding from the centre, providers’ plans aggregate to a deficit of around £580m in 2016-17.
Although NHS Improvement says this can be reduced to £250m, there are likely to be significant risks in the plans already.
If recent years are anything to go by, the number is more likely to get uglier than prettier.
Simply calculating the difference between last year’s underlying provider deficit, of £3bn, and the extra £1.8bn, would leave us with a deficit of around £1.2bn – some argue that there’s no reason to think this year’s shortfall won’t be around this level.
How to cover off the deficit
Whatever it turns out to be, the provider deficit will need to be covered off.
The first option will be the £800m (1 per cent of allocations) which has been held back from CCGs.
As Simon Stevens told the NHS Confederation conference, this will be held as a contingency fund in case of overspending in the provider sector, with mental health, primary care and community services potentially losing out (again).
A second option could be a further transfer from the capital budget, although it’s possible that the Treasury would refuse to sanction this.
The transfer to revenue which has already been approved will take the capital budget down to £3.6bn, which is the same as was spent last year (after £950m was transferred to revenue), and represents a 13 per cent cut in cash terms compared to 2010-11.
Constantly squeezing the capital budget is at best unsustainable, and at worst creating more expensive problems in the future. On the other hand, it may be the option with the lowest likelihood of upsetting people, so don’t rule it out.
Risk of a backlash
Both these options are pretty unpalatable and likely to damage the speed at which the NHS can get back on a sustainable footing – so national leaders are effectively heaping pressure on to acute providers to curb costs and thereby reduce their overspend.
If the provider deficit does not move in the right direction in the next few months, we can expect the screws to tighten even further on these measures.
As illustrated by calls from NHS Improvement chief Jim Mackey in recent weeks – and the response from chief executives to last week’s reset – this means highly unpleasant and controversial actions, such as cutting clinical staff and closing loss-making services.
There is a significant risk of a backlash from local NHS leaders, and will test the nerve of political leaders – including a cabinet with quite a few new members – to force through cuts in the face of fierce local campaigns.
NHS England forecasting first ever overspend
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Following the Money: The unpalatable options for breaking even this year