Why the 'good year' has not been good enough on efficiency

It’s not a surprise that the outturn forecast for NHS providers had edged up from a £0.6bn overspend target to a +£0.9bn position at the end of Quarter 3, 2016.

Apart from anything else, the system incentivises providers to give an optimistic forecast at the end of Quarter 2 in order to meet the rules to obtain their share of extra funding. It’s more surprising that the position isn’t expected to deteriorate further in the last quarter – the winter months – in which activity is traditionally at its most intense.

That suggests either major progress is expected on efficiency savings, or some behind the scenes activity is expected to sort matters.

Either way, a £0.9bn/1 per cent provider overspend doesn’t sound too alarming given the well-publicised pressures on the system. After the £2.5bn provider overspend last year, it might even sound like an impressive improvement, and well within the bounds of what can be offset by underspends elsewhere within the health system.

But saying that would be to lose sight of several factors which suggest that the necessary progress is not being made in what was meant to be ‘the good year’ for NHS finances. This could mean that severe problems lie ahead in the leaner years to come.

Inflation factors

This is ‘the good year’ because £4bn of the £8bn injection of cash which Simon Stevens requested to support the Five Year Forward View is frontloaded into 2016/17. £1.8bn of this funding, which was nominally set aside for transformation, has gone directly into supporting providers.

Without that, the headline overspend would have been worse than last year’s £2.5bn. The rest of the additional £4bn should allow clinical commissioning groups to pay for expected increases in activity, and to pay providers at a (slightly) better rate than in previous years, when prices were typically cut in both nominal and real terms.

Inflation hasn’t been an obvious problem – the NHS has inflation factors of its own. When budgets were set inflation of 2.1 per cent was allowed for, but since the CPI was below 1 per cent for most of 2017 increased inflation cannot account for a predicted overspend. It’s true that demand is rising, for example the 3.5 per cent increase in emergency activity, and delayed transfers are also increasing on the back of the tough funding position for social care.

Providers are at least £1.8bn better off than they were last year, in which case the outturn forecast represents a slight deterioration in the position

Most of this increased demand is paid for by commissioners under the tariff based payment system, but providers are also affected. Providers only receive marginal rate income increases above their emergency activity baseline and delayed discharges are typically reimbursed at the lower, excess bed day rate. That can leave them with very low levels of income to cover their fixed costs; and that extra demand means waiting time targets are much harder to achieve.

This may lead to problems in the future as any additional elective activity which results often has to be carried out at premium cost. Overall, though, it’s as benign as it’s likely to get for providers. Yet still they are overspending – and at a time when CCGs are also struggling to keep to budgets (they reported a £0.4bn overspent in Quarter 3), so limiting the scope for assistance from the central budget.

Providers are at least £1.8bn better off than they were last year, in which case the outturn forecast represents a slight deterioration in the position. Efficiency, it follows, has not improved at the significant levels required to stabilise the NHS for the tougher years ahead, and for the delivery of the Five Year Forward View with its notorious £22bn savings requirement.

Rob Whiteman is chief executive of CIPFA. Read CIPFA’s view on the health of health finances in our insight paper More Medicine Needed