Sustainability and financial performance of acute hospital trusts Contents

Conclusions and recommendations

1.The financial performance of NHS trusts and NHS foundation trusts has deteriorated sharply and this trend is not sustainable. NHS trusts’ and foundation trusts’ finances have deteriorated at a severe and rapid pace, with trusts’ £843 million deficit in 2014–15 representing a sharp decline from the £91 million deficit reported in 2013–14. This situation looks set to worsen with three quarters of trusts in deficit six months into 2015–16. NHS Improvement told us that by the end of 2015–16 the deficit could be more than £2.5 billion, although with the capital transfers and accounting adjustments made by the Department and NHS Improvement, it hoped to reduce this years’ deficit to £1.8 billion. Not enough has been done soon enough to tackle this spiralling trend. Now many trusts are only getting by on the extra cash given to them by the Department and NHS England, which together provided £1.8 billion of financial support to trusts in financial distress in 2014–15. The Department, NHS England and NHS Improvement told us about the £1.8 billion sustainability support that will be available to trusts in 2016–17 to provide “breathing space” to help trusts’ finances get back on track, although we heard that this fund would not itself clear the deficit. The Department is also looking to generate £2 billion this parliament from disposing of surplus estate but there is little detail on how this will be realised.

Recommendation: The Department, NHS England and NHS Improvement should make sure all trusts in deficit have realistic recovery plans by the start of the 2016–17 financial year that will lead to timely and sustainable improvements.

2.The targets set by NHS England and Monitor for providers to make efficiencies were unrealistic and have caused long-term damage to trusts’ finances. The 4% efficiency target for trusts set by Monitor and NHS England was driven by the shortage of resources available across the NHS overall. Historically the NHS has achieved efficiency savings of 1–2% and a target of more than double this has proved to be overly ambitious. While the Department told us some trusts should have even tougher targets placed on them, NHS Improvement recognised that efficiency savings of this magnitude were unachievable for many trusts. NHS England agreed that aggressive efficiency targets had caused long-term damage to trusts’ financial positions. It said the new efficiency savings target of 2% from 2016–17 was a “more reasonable” requirement for trusts to deliver.

Recommendation: The Department, NHS England and NHS Improvement should set informed and realistic targets for providers to make efficiencies.

3.The data used to estimate trusts’ potential cost savings targets is seriously flawed. The previous Committee recommended in 2015 that NHS England and Monitor should collect consistent and detailed cost data across the NHS and use this to set efficiency savings targets for NHS bodies. Both accepted this recommendation at the time and so it is concerning that Lord Carter’s team used trusts’ cost data from 2014–15 to set savings targets for trusts, when half of trusts’ cost data from the previous year was described as “materially inaccurate” by Monitor. NHS Improvement agreed that the quality of the data needs to improve and said that organisations must work together to get better cost data. More widely, the proper collection of data is an issue we see time and again across government. The effectiveness of targets is dependent on the quality of the underpinning data and inaccurate cost data will lead to ill-informed savings targets for trusts.

Recommendation: NHS Improvement should set out how it will work with trusts in the 2016–17 financial year to improve the quality of the data on which its savings targets are based.

4.The current system of paying providers through a national tariff does not support financial sustainability nor incentivise joined-up services. Monitor and NHS England set the prices and rules that determine how healthcare providers are paid through the national tariff payment system. The NAO’s report showed that trusts which rely mainly on tariff income are more likely to run a deficit than trusts that receive extra income for carrying out activities such as teaching and research. Penalty fines imposed by clinical commissioning groups for non-compliance with performance targets create added financial pressure for trusts. NHS Improvement told us that its payment system should support providers to work in a sustainable way but it acknowledged that the current system was “not fit-for-purpose” in this regard. NHS England said the payment system was not driving improvement nor incentivising the joined-up services which would reduce demand for acute services and help trusts to better cover their costs.

Recommendation: NHS England and NHS Improvement should set out proposals for changing the payment and contracting system for providers to one that supports financial and service sustainability, incentivises integration and service collaboration and reduces the need for reactive financial support to providers in difficulty.

5.Acute hospital trusts’ spending on agency staff has contributed to their financial distress. Acute trusts’ spending on temporary staff increased by 24% between 2012–13 and 2014–15, as a result of difficulties recruiting permanent staff and new requirements for safe staffing levels. NHS England said that spending on temporary staff was the largest driver behind trusts’ increasing deficits. It described how some agencies providing temporary staff had taken advantage of the situation to charge “rip-off” fees, and the Department argued that no one had foreseen the scale of “exploitation” by agencies. NHS England and NHS Improvement plan to use the collective bargaining power of the NHS, as a large employer, to drive down prices paid for temporary staff. NHS Improvement estimates that the predicted £4 billion expenditure by trusts on agency staff in 2015–16 could be £880 million lower if there were no excessive agency charges. We accept that the cost of agency staff may be excessive, but we also note that the use of agency staff in the NHS is nothing new and that the opportunity for agencies to take advantage of staff supply shortages was predictable. Yet the Department, NHS England and NHS Improvement are only recently making serious attempts to control agency spending. We also note that, while our witnesses attributed close to £1 billion of deficit ‘pressure’ in 2015–16 to additional spending on temporary staff, the root cause is the volume of temporary staff required, as opposed to the element of the associated costs which is the agencies’ commission. Ultimately, until the NHS solves its workforce planning issues, including the lack of affordable homes for NHS staff, it will not solve the problem of reliance on agency staff.

Recommendation: NHS England and NHS Improvement should be clear that spending on agency staff is only one contributing factor to the deficit. They should set out how they will support providers to secure the collective action that is needed to get value for money from the use of agency staff as a matter of urgency.

6.There is not yet a convincing plan in place for closing the £22 billion efficiency gap and avoiding a ‘black hole’ in NHS finances. Acute hospital trusts are at a crisis point and NHS Improvement acknowledged the need to “regroup” and “rethink” priorities. We recognise the huge challenge of putting the NHS on a firmer financial footing and maintaining services at a time of increasing demands and when budgets are tight. The Department, NHS England and NHS Improvement understand the scale of the challenge and told us about their ongoing work to try to address the problems. For example, NHS England and NHS Improvement told us it will be supporting and challenging the local sustainability and transformation plans that each part of the country will produce in June 2016. We support their efforts, but have not yet seen the overarching and convincing plan for where and how the £22 billion savings needed by 2020–21 will be made. The NAO has also commented on the lack of a detailed plan and made various recommendations in its report to help work towards achieving long-term sustainability.

Recommendation: The Department of Health, NHS England and NHS Improvement should report to us jointly in September 2016 on their progress with implementing the NAO’s recommendations and the further recommendations we make in this report.

© Parliamentary copyright 2015

Prepared 10 March 2016