The latest figures on NHS providers’ deficit are not surprising but they are very worrying – Anita Charlesworth analyses why

NHS providers are in deficit again – a total overspend of £886m at the end of December, somehow to be reined in to £873m by the end of the financial year. How do you view a deficit on this scale?

In some ways it’s not very shocking – it’s the third year in a row of deficits, and this year is a big improvement on the £2.5bn overspend in 2015/16. Given the context of the operational pressures on the NHS things might have been much worse financially.

However, if we aren’t shocked, that doesn’t mean we shouldn’t be very worried.

Worried because this financial year (2016/17) is the year of plenty when the 2015 spending review settlement was front loaded. NHS England funding increased by some £3.8bn above inflation this year – an uplift of just under 4 per cent.

Much of that funding was specifically directed at putting provider finances back on a sustainable footing with the £1.8bn pot of sustainability and transformation funding (STF). Despite that, almost 60 per cent of providers can’t balance their books – rising to more than 70 per cent of acute hospitals. More than 10 providers are expecting to end the year with deficits above £40m, despite the STF money.

With significant capacity constraints, these emergency admissions are crowding out elective care

The funding outlook for the coming few years offers scant comfort. Next year NHS England’s funding growth is half the rate of this year and in 2018/19 funding will be flat. Factor in population growth and these NHS England figures are sobering – spend per head will fall by 0.6 per cent in real terms in 2018/19 and then increase by just 0.2 per cent in 2019/20. Time is not on the side of the NHS.

There is much talk of unprecedented demand as the source of the problem. It is certainly true that A&E attendances and outpatients are growing rapidly. But across the NHS overall, cost weighted activity growth is 2.2 per cent, relatively modest by historic standards. The challenge is that the mix of activity in our hospitals is changing, causing major financial and operational problems. Alongside rising A&E attendances, emergency admissions have increased.

Uphill struggle

With significant capacity constraints, these emergency admissions are crowding out elective care. This has a direct impact on providers’ bottom line – dealing with lower growth in funding for planned operations as well as additional staff costs to meet the spikes in demand.

Despite falling by half a billion pounds since last year, agency costs are still substantially above planned levels and providers are expected a 20 per cent overspend against their plans this year.

The Q3 Financial Performance Report from NHS Improvement shows alongside low provider income growth, delivering efficiency savings is proving to be an uphill struggle. Unsurprisingly providers are struggling with their cost improvement plans. But given the dire outlook for the next few years, of most concern is the high reliance on one-off savings. Providers are projecting that more than £600m of their savings this year will be down to one-offs and so that flows straight through to the efficiency ask for next year.

These financial and performance issues can’t be solved unless something is done about the chronic underfunding of social care.

The challenge to stabilise NHS providers’ finances and performance is clearly much harder than the government expected. While the health service is too complex for panacea solutions, these financial and performance issues can’t be solved unless something is done about the chronic underfunding of social care.

Of course, not all delays in discharging people from hospital are caused by access to social care, but there has been a sharp increase in those that are – up 40 per cent this year.

With rapid increases in emergency admissions the service is only as strong as the weakest link in the urgent care pathway. Older and vulnerable people are the key users of emergency care, and they also depend on social care. Back in 2015 Simon Stevens made clear that the Five Year Forward View could only be delivered if there was a sustainable solution for social care.

The extra money going into social care does not amount to a sustainable solution. Local authorities have been given the power to raise council tax by 3 per cent in each of the next two financial years, which the LGA estimates will raise around £543m of additional funding – a significant sum and a big ask of local council tax payers.

Huge mountain

But in reality that will barely cover the cost of the increase in the national living wage for those working in the sector, which will add around £600m to the cost of publicly funded social care next year.

As it stands, there is still a gap of more than £1bn to meet demand pressures next year. Without measures to address this gap urgently in next month’s budget it is difficult to see how providers can return to financial and operational stability.

Even with social care investment the mountain looks huge; without it those in the service would be forgiven for feeling that they are being set an almost impossible task.

Anita Charlesworth is chief economist at The Health Foundation