Forget the past of NHS finances and deal with the future

Most financial professionals in the NHS are glad to see the back of the 2015-16 financial year. For them, recent data on provider finances is simply a reminder of how bad things have ended up.

They’ve watched budgets they dedicated so much of their career to keeping balanced collapse under the tightest funding squeeze in the history of the NHS.

In total, providers have a combined deficit of £2.5bn in one year and 65 per cent of them, including 9 out of 10 in the acute sector, ended the year in the red. This was by no means a surprise.

A cruel equation

In fact, it’s worth remembering that the sector was planning to overspend by £2bn at the beginning of the financial year. That’s because, through no fault of their own, providers have found themselves at the end of a cruel equation in which less money plus more people equals deficit.

Demand for healthcare is not responding to changes in the income of those organisations delivering it

Make no mistake about it, this is why the NHS is in this terrible position. Unplanned pay costs draw a lot of attention, and no wonder with the extraordinary growth in agency spending.

Yet, while this accounts for a billion of last year’s deficit, there is just as much of a shortfall on non-pay spending, such as on drugs and supplies. It doesn’t take too much economic analysis to identify that demand for healthcare is not responding to changes in the income of those organisations delivering it.

Far from being an issue isolated to the financial position of providers, the impact is spreading to commissioners with rising pressures on their ability to balance budgets. They are the ones having to fund the increase in people accessing hospital care, depleting what is left to invest in services outside of the hospital.

There is little to suggest that we are about to turn this demand curve. In fact, cuts to the public health grant and a back-loaded social care funding settlement will make it harder to realise the radical upgrade needed in preventing ill health and the progression of conditions best met through local, community-based interventions.

Efficiency at top

If demand does refuse to shift, then something else will need to take centre stage. This could only be either efficiency or funding.

Efficiency is still firmly at the top of the agenda, albeit based on a narrow technical definition.

Confidence will also then be placed on reducing variation in efficiency between providers

An unprecedented challenge has been set for provider productivity improvements of almost £9 billion a year by 2020. This comes as the trend on sector efficiency is dipping, which has forced national bodies to increase net tariff prices for the first time in five years.

Confidence will also then be placed on reducing variation in efficiency between providers, although evidence on this suggests that “catch-up” is uncommon in the NHS. Overall, most NHS leaders do not believe we’ll make the £22bn efficiency savings needed – with 96 per cent saying so through a recent NHS Confederation member survey.

If efficiency proves too ambitious, attention must then turn to funding, which is a door some are already knocking on. The Treasury believes it made its case in the Spending Review and it’s hard to see anything that has changed in the last six months to make them more interested in reopening the settlement.

We might point them to the pressures on public health and social care funding, as mentioned earlier, which does fall within the Chancellor’s gift.

More likely though, they want to wait and see how the NHS spends the additional funding already committed over the next two years, totalling more than £5bn. Above all, they will want signs that funding is unlocking genuine transformation, instead of simply plugging the gaps in a creaking existing model.

A strong case on funding could be made to HM Treasury built on greater confidence that the NHS is getting the most out of resources and more certainty on economic growth. Unfortunately, we’re not there yet on both counts.

For now, the NHS must turn the page on the last few years of financial decline and work over the next two to tell a good story on additional funding. It won’t be the sunshine some were predicting and, only if national and local cooperation comes together exceptionally well, will the service have just enough headroom to achieve what changes are needed in the short to medium term.

Paul Healy, senior policy adviser on economics and regulation, NHS Confederation