The NHS has been left with no financial wriggle room

The 2015-16 Department of Health accounts have rarely made such interesting reading. As a top line, the Department overspent by £207m the total revenue budget set by HM Treasury.

In normal circumstances this would also have meant overspending the budget voted by MPs, inflicting the full panoply of investigations and controls that comes with a breach of parliamentary votes on to DH and national NHS body leaders.

Fortunately due to an ”administrative error” (NAO’s words), the department omitted to tell the Treasury it had received an excess £417m from national insurance, and this can be set against the overspend for parliamentary purposes.

The accounts show NHS providers overspent by £2.8bn across the year (reduced to £2.5bn by one-off measures). How did the department manage to get so close to the Treasury’s total, given this enormous overspend? NHS Commissioners helped by underspending by £700m.

The NAO said this underspend was “not the result of any overarching plan but are rather non-recurrent and therefore unavailable in 2016-17 onwards”. NAO also pointed to a further raft of one-off measures. These include switching capital to revenue (£950m over and above the £185m switched earlier in the year); a one-off payment from the Medicines and Healthcare Products Regulatory Authority (the medicines regulator) back to DH (another £100m); and a new approach to classifying payments due to EU countries for treating UK citizens (£150m).

All of these – and a series of other accounting changes – the NAO recognises are above board. However, it also notes, ”none… would be at the core of a comprehensive plan to secure the financial sustainability of the NHS in England” and they have, to some extent, focused the mind of the finance community on the short-term of 2015/16 rather than the longer term changes needed to make the NHS truly sustainable.

Further deterioration

Taken together this means total spending in 2015-16 rose by 3.4 per cent in real terms – well above the average annual increase of less that 1 per cent a year allocated in the recent spending review for the rest of the decade and the highest rate since 2009/2010 before the government began its austerity drive.

Depressingly, this comparatively high rate of spending growth has not delivered improved operational performance – in fact 2015/16 saw a further deterioration in waiting times for both A&E and inpatient care.

What does all this mean for the current financial year? The spending review settlement for the NHS provided a cash injection of £5.4bn in 2016-17 across NHS England to help the NHS restore financial control and fund transformation. This is critical to prepare the NHS for the tough years of next to no real terms growth in the years ahead.

But with a full-year provider deficit of at least £2.8bn, most of the funding for transformation has been eaten up by the imperative of financial stabilisation.

To compound the gloom there are still question marks over whether NHS providers will be able to balance their budgets in 2016/17. NHS Improvement has now formally accepted that NHS providers will not balance their budgets this year.

Big issues

The ‘reset’ announcement has set a new – less demanding – target of a provider-wide net deficit of £250m in 2016-17. But how this £250m will be funded is not clear given that DH and commissioners have little or no financial wriggle room – does it suggest another transfer from the capital budget or delays in promised service improvements? This also means that there is no contingency for a bad winter or any other major health incidents.

So far, the Treasury has given the Department of Health a remarkably easy time for breaching the departmental spending plan in 2015-16 – no doubt distracted by the big issues of macroeconomic stability and growth following the EU referendum. But its tolerance and room for financial flexibility in 2016-17 must both be limited. The Department of Health has shaken out every penny from the back of the sofa for 2015-16.

Caps on agency spend and vacancy freezes are short term fixes but don’t address the underlying problems

The only option left is to ‘reset’ the finances and make it clear that the budget constraint is real. The new special measures finance regime is designed to signal that financial control is imperative and organisations that don’t prioritise it will face harsh consequences. Saying it must be done is one thing, controlling spending is another, and of course with the raft of ‘reset’ actions, efforts must be redoubled to make sure quality of care does not slide.

But to deliver control of the money requires a real handle on the underlying resources – namely workforce. Caps on agency spend and vacancy freezes are short term fixes but don’t address the underlying problems. If the NHS is to manage 2016/17, and most importantly be in any sort of fit state to sustain services in the coming years, policy and action will have to shift – and shift substantially.

Somewhat counterintuitively, to deliver control the NHS needs more permanent staff – but it also needs to focus on workforce productivity. This must lead to a single-minded focus on using the skilled workforce well, including implementing the Carter review recommendations, tackling unwarranted variations in clinical practice and good workforce management.

Anita Charlesworth is director of research and economics at the Health Foundation, and Richard Murray is director of policy at The King’s Fund