A prognosis for health finances

Dr Eleanor Roy, policy manager for Health and Social Care at CIPFA, looks at the way funding flows through the health system and how it does not support the policy agenda for more integrated, place-based care and in some way presents a barrier

Without a doubt the last 10 years have been tough. NHS spending has grown, but less so than at any point in its history. The crunch has been harder on social care and public health, with funding reductions on both cash and real terms over the same timescale. So, it’s no surprise that the health and care system is under severe financial pressure.  

Rising demand, budget constraints and the need to deliver ‘more for less’ have surely pushed the system to its limits. At the same time, the government’s policy of further integration and the vision for prevention have not been reflected in the allocation of funds, nor the financial frameworks involved.

The additional funding for the NHS announced in the recent budget, although welcome, does little to help. The funding is wholly allocated to the NHS, with no provision for public health or social care, and given the current position, is likely to be utilised to address short-term pressures.  

More money alone is not the answer. The health and care system needs to be adequately funded to ensure it is financially sustainable in the long-term, and the financial architecture must be reformed to make it fit for purpose to meet the policy agenda of greater prevention, and integration – to achieve place-based care with a focus on outcomes.  

The way funding is allocated to the health system is complex and subject to a range of statutory and administrative requirements on individual organisations. The Department of Health and Social Care (DHSC) receives an annual funding allocation, voted by Parliament.  This is then allocated to arm’s length bodies such as NHS England, Public Health England and the Care Quality Commission. NHS England in turn allocates funding to Clinical Commissioning Groups (CCGs) to commission services from NHS providers. At each stage of this allocation process, each individual body has set revenue and capital limits within which it must remain.

Control vs collaboration
In terms of financial management in the health system, it appears that a single metric, the ‘control total’ is sacred. These were introduced in 2015-16, when for the first time NHS England almost overspent its budget. The aim was to improve financial performance by setting a minimum level which each individual organisation is accountable for delivering. The aggregate of the control totals is set to ensure the NHS meets its overall financial targets. Access to other funding streams, such as sustainability and transformation funding, is dependent on achieving the control total. This creates a perversity in that, it may incentivise the achievement of improved financial performance using non-recurrent mechanisms, such as the release of provisions, in place of recurrent savings – thus potentially increasing future risk.  

In 2018, integrated care systems (ICSs) were introduced - these are a small number of geographically grouped providers, commissioners and local authorities with collective responsibility for planning and delivering health and care services in their local area. Clearly the need to for individual organisations to meet their control total does not incentivise integrated working.  Local authorities also have a statutory duty to set a balanced budget. The pressure on each individual organisation to meet its financial obligations – and the disparity between their financial systems - makes it difficult for them to pool budgets, commission services jointly or share risk. ICSs are required to work within a single system control total. Achieving this overall system control, whilst maintaining the individual organisations existing statutory requirements is, to say the least, a complicated exercise.  

Competition vs collaboration
As if this is not complex enough, the way that money actually flows around the health system can act as a barrier to greater integration. The Health and Social Care Act 2012 increased competition and choice in the health system, but this may act as a disincentive to integration and a focus on outcomes. Commissioners individually contract with providers; the NHS tariff incentivises activity in an acute care setting, rather than place-based care; CCGs bear the most of the risks associated with meeting demand, without holding the levers with which to influence it; and acute provides bear the risk of increasing costs of service delivery, but cannot incentivise the most cost-effective options or refuse to deliver increasing activity.

Yet more complexity is added by ‘add on’ funding mechanisms, such as the Provider and Commissioner Sustainability Funds and Commissioning for Quality and Innovation. To incentivise and facilitate integration the Better Care Fund was introduced, and improved. Whilst it may have incentivised closer working, it has failed to integrate governance and delivery, and added yet another mechanism on a wider system not aligned with the policy of integration. Where integration is working well and systems are maximising pooled budgets, they are doing so in spite of the legislative and administrative constraints.

As the saying goes, ‘money talks’ - the way it is distributed and the associated objectives drive the behaviour of individuals and organisations within the system. Currently, the financial framework does not promote, or even enable, system-wide efforts to reduce demand, address duplication in the system, or to move to a place-based outcomes focused model of care. Even the dichotomy of eligibility requirements, with health care free at point of use and social care being means-tested, complicates service planning for the needs of individuals.

A realistic view of savings
The Five Year Forward View, provided a vision for increased prevention, greater integration, the drive for place-based care, better outcomes and reduced costs – but it gave no direction as to how these ambitions could be met. CIPFA concluded that the financial model behind the plan was untenable, and created significant challenges to meet the aspirations (and efficiency savings) proposed.

The 2017-18 year-end figures clearly illustrate the current pressures. The provider sector showed a deficit of £986 million, after receiving £1.8 billion in sustainability and transformation funding. There was also a shortfall of £477 million in savings against plans. CCGs overspent by £213 million, following the release of £360 million from the risk reserve. This was offset by an underspend on the commissioning side at national level, giving an overall underspend of £970 million for NHS England as a whole. This demonstrates the reliance on reserves and funding intended for long term transformation just to reduce deficits.

The NHS is ever more reliant on additional funding and non-recurrent savings in order to meet its financial pressures. This said, productivity within the NHS has improved in recent years, but pay restraint and reductions in the tariff have contributed significantly to this. Some of the savings achieved have been illusory – for example, switching capital to revenue to meet short-term pressures whilst draining the capital required for long term investment.  Such measures cannot be sustained and future improvements will need to come from more fundamental approaches.

It must be recognised that individual organisations have achieved impressive levels of savings. For example, trusts have achieved almost £7 billion in recurrent savings since 2010-11, in addition to the £20 billion ‘Nicholson challenge’. It is now widely recognised that such opportunities are largely exhausted, with individual organisations reliant on non-recurrent savings or long-term transformation.

A system-wide approach to achieving further savings is required – placing overly ambitious savings requirements on organisations will merely add to larger deficits. Such a system-wide approach needs to be based on realistic assumptions and be underpinned by a clear framework.

Time for change
The recent NAO report on the government’s overall planning and spending framework highlighted an absence of long term plans, over-optimistic medium term plans and short term decisions impacting on long term value for money, would not have been surprising for those familiar with the health and social care sector.

The current approach to funding for health and care creates uncertainty and encourages short term decisions rather than long term investment and planning for future pressures.  The use of sustainability and transformation funding to achieve financial balance clearly demonstrates this – a short term fix at the expense of long term financial sustainability and value for money.

The current financial framework was not designed to work in the manner the policy rhetoric now encourages, and there is widespread consensus that the financial architecture is in dire need of reform to align with the aims of wider integration and place-based care. There are early signs of recognition that the financial architecture is in need of reform. For example, intentions for arm’s length bodies to work more closely together, and indications from the 2019-20 planning guidance that corrections to financial mechanisms are being considered.

Funding flows must incentivise the behaviours and activities needed to shift the balance of care. Longer term funding is required to allow planning for investment and financial sustainability. Funding needs to be focused on outcomes to drive value with joint accountability across the system. A system-wide outcomes framework may provide clearer incentives, together with the introduction of arrangements for sharing risks and benefits.

The ‘front-loading’ of NHS funding has not changed the underlying position – as the NAO put it: ‘These cash injections paper over the cracks in NHS finances rather than achieve lasting improvement.’

With a commitment that the NHS long term plan will reform the funding arrangements for the NHS and a forthcoming green paper expected to propose new models of funding for social care, the time to take a more stable and sustainable approach to funding the health and care system is now.

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