10 quick reflections on the DH's 2016-17 accounts

Earlier this week saw the publication of Department of Health annual report and accounts for the last financial year.

As expected, they show at a headline level in 2016/17 the department contained its resources within its budget and broadly delivered financial balance for the sector.

But as ever the accounts also provide a trove of information to pick at and pore over. Here are some initial reflections on what the accounts for 2016/17 tell us: 

1. 2016/17 was the so-called year of plenty – based on the last spending review it was the year that, by a distance, received the biggest funding increase expected between 2015-2020. But the provider sector deficit was still large at -£791m, which was over plan and heavily reliant on non recurrent funding. This means 2017/18 will be really tough – remember the tariff net increase reduces to 0.1% and provider cost improvement plans (CIPs) will have to average 4.2 per cent to achieve exacting control total targets. Bear in mind also that in accounts show in 2016/17, for the fourth year in a row, the overall DH position was supported by a significant capital to revenue transfer, this time equalling £1.2bn. This level of transfer cannot continue indefinitely.
2. Quite apart from the actual deficit achieved, it is interesting the DH accounts say the provider sector planned for a “small” deficit of about £600m in 2016/17. A deficit of about £600m is not small. It is only small compared to the actual £2.5bn deficit in 2015/16. This shows that large deficits have become a new normal – but we need to ensure that this means the parameters of the debate on funding don’t shift as well. Requiring trusts to continually plan for sizeable deficits is not a sustainable way to run a system. Proper funding is required. 
3. The NAO is happier with the DH than last year, when they landed the budget due to some last minute accountancy adjustments. But it still thinks the medium/longer term prognosis at a local level is unsustainable. Comptroller and auditor general of the NAO Sir Amyas Morse states: “Unlike in 2015-16, the department itself has not been forced to use the same level of significant one-off accounting adjustments to remain within its budget. However, the system at a local level remains under considerable financial pressure and Monitor’s annual report and accounts note that “the NHS still has a long way to go before we can regard it as being on a sustainable footing again”.
4. The report reminded me that some £50bn of DH spend is on staff, which causes an intake of breath when considering removing the public sector pay cap. We have argued that developing a strategy for ending pay restraint over the course of this parliament is the right thing to do, but no one should have any illusions about the impact it will have in terms of the extra revenue funding required to pay for it.
5. I was surprised provider asset disposals to generate capital only equalled £200m. This is despite trusts being incentivised to take exactly these sorts of actions by control totals, as they could have been the decisive factor in being able to unlock millions in sustainability and transformation funding. This should be kept in mind when debates are raging about how much capital can “easily” be generated through asset disposals in the coming years.
6. The DH’s public dividend capital (“loans” that essentially do not have repayment requirements) support for trusts’ bottom line is not yet dead, although loans are now used more frequently. Despite sustainability and transformation funding, public dividend capital for ‘non programme’ elements equalled some £243m. Indeed the accounts note public dividend capital is “still issued as financing as planned support where trusts have a robust recovery plan in place”.  This is despite reports last year that public dividend capital would be largely replaced by working capital loans. 
7. CCGs deserve considerable credit.  Some commentators doubted they would in reality really be able hold back the 1 per cent of their resources required by the DH in order to mitigate the predicted provider deficit. But they did, and this was of course key to the DH landing its budget.
8. The financial special measures programme is “estimated” in the accounts to have delivered £100m in savings. This is coincidently exactly the same as what was estimated could be achieved by the programme by NHS Improvement once the initial cohort of trusts in financial special measures were identified in October 2016. It would be good to see more detail on how exactly this programme has indeed delivered the entirety of its projected savings.
9. DH accounts say the Department spend on private providers was essentially flat from 2015/16, but this does not tell the whole story. We know trusts’ own spend on private providers went up considerably as they were forced to outsource elective demand last winter to help with flow pressures in emergency demand. This meant the purchase by NHS providers of healthcare from independent sector providers increased by nearly 60 per cent in 2016/17, to nearly £400m.
10. Control totals and financial special measures are lauded in the accounts as being the items of grip that turned the situation round from the record deficit in 2015/16. But we need to remember the counterfactual – trusts would have striven for savings in any case and they are not just motivated by regulatory action.  The equation that more oversight simply equals better results is too simplistic. There needs to be balance between grip and provider autonomy in the medium term – what this might look like is something NHS Providers is currently working on.

Edward Cornick is finances policy adviser at NHS Providers.