Sustainability and transformation in the NHS Contents

1Financial sustainability of the NHS

1.On the basis of a report by the Comptroller and Auditor General, we took evidence from the Department of Health and Social Care (the Department), NHS England and NHS Improvement on the sustainability and transformation of the NHS.1

2.The Department is ultimately responsible for securing value for money from healthcare services. It sets objectives for the NHS through an annual mandate to NHS England, who allocates money to clinical commissioning groups to commission hospital services, as well as commissioning some services itself. NHS trusts and NHS foundation trusts (trusts) manage their expenditure against the income they receive. NHS Improvement oversees and monitors the performance of trusts. The Department has made NHS England and NHS Improvement responsible for ensuring the NHS balances its budget.2

3.In 2016–17, the Department gave £105.7 billion to NHS England to plan and pay for NHS services. The greatest share of the budget was spent by 209 clinical commissioning groups, which largely bought healthcare from 235 hospital, community and mental health trusts. In 2016–17 NHS England, clinical commissioning groups and trusts reported a combined surplus of £111 million against their income, a significant improvement since 2015–16 when they reported a combined deficit of £1,848 million. The improvement was the direct result of the Department’s £1.8 billion Sustainability and Transformation Fund paid by NHS Improvement to trusts for meeting financial and performance targets. Without this Fund, the combined financial position of the NHS would have been only slightly better than in 2015–16.3 The Department and NHS England used other measures to rebalance finances in 2016–17, including transferring money for capital projects to revenue budgets and restricting commissioner spending.4 After the first nine months of 2017–18, trusts were forecasting a combined deficit of £931 million by the end of the year.5

Funding to local NHS bodies

4.In 2016–17, the Department used a £1.8 billion Sustainability and Transformation Fund to encourage trusts to improve their financial performance. NHS Improvement set target financial positions for each trust to meet in order to access the Fund. NHS Improvement told us that these financial targets contributed to the significant improvement in the financial position of the trust sector in 2016–17.6 The National Audit Office found that the Fund incentivised most trusts to improve their financial discipline. However, some trusts received no payments. Others received bonus payments which increased their surpluses further.7 Despite the Fund’s name, it has been used solely to tackle the large deficit in the trust sector which, as the Department accepts, limits the transformation of services.8 The Department is committed to using the Fund to the end of 2018–19, and is currently reviewing its future use. NHS England told us that it did not want the Fund to continue forever.9

5.In the November 2017 Autumn Budget, HM Treasury announced £337 million of additional funding for the Department in 2017–18, partly to cope with winter pressures. So far the Department has committed £287 million of this, with £150 million paying for the costs and pressures from winter already incurred.10 We asked whether this meant that trusts were drawing up and carrying out plans to tackle winter pressures that they initially could not fund. The Department explained that without the additional funding, trusts’ plans would have been delivered by restricting elective and other discretionary activity.11 The Department and NHS Improvement accepted that trusts should be allocated funding early in the year, but failed to commit to doing so.12 With less than a month to go of the financial year, the Department had still not decided how to spend the remaining £50 million.13

6.The financial sustainability of the NHS relies on trusts and clinical commissioning groups making year-on-year (recurrent) savings rather than one-off (non-recurrent) savings. Otherwise, trusts and clinical commissioning groups will need to make additional savings the following year to replace any non-recurrent savings, such as selling surplus buildings, made in the current year. During the session, NHS Improvement expressed concern at the rising level of non-recurrent savings: for trusts they increased from 14% of efficiency savings in 2014–15 to 22% in 2016–17, and for clinical commissioning groups they increased from 14% in 2014–15 to 17% in 2016–17.14 We received written evidence from NHS Providers, who told us that trusts have resorted to these unsustainable, non-recurrent savings amid pressure to meet financial targets.15 The Department told us that it hoped that trusts’ and clinical commissioning groups’ reliance on these one-off measures would fall over time, but would not commit to a timescale for eliminating them.16

Staffing pressures in the NHS

7.The NHS faces a range of pressures in managing its workforce, such as ensuring that hospitals have enough staff to meet the need for additional services over the winter.17 Increases in hospital staffing levels over the winter were provided by existing staff working more, either by working overtime or as part of bank arrangements. While these banks of flexible staff are needed to manage the peaks and troughs in demand, they cannot be relied on to replace a properly staffed NHS.18 There are currently high numbers of vacancies in the NHS. In the session, NHS England highlighted particular pressures in the nursing and health visitor workforce. We received written evidence from the Royal College of Nursing, who told us that between October 2017 and December 2017, there were 36,000 full-time equivalent registered nursing vacancies across NHS providers, equivalent to one in ten nursing posts being vacant. NHS England told us that tackling these pressures will depend on a range of measures, including increasing the number of training places, improving retention rates and increasing nurses’ pay.19 The Department told us that it is seeking to maximise the number of nurses entering the profession through different routes, including through nurse apprenticeships, although it has now stopped giving nurses bursaries for training. It also told us that it is working with Health Education England to consult more widely on the future workforce strategy for the NHS.20

8.The NHS’ vision for future care services, the Five Year Forward View, sets out a much larger role for out-of-hospital care.21 More staff in key areas of the health service, particularly GPs, are needed to achieve this. NHS England told us about a number of current initiatives to boost the number of GPs in the workforce. These include: a salary supplement scheme to attract trainees to hard-to-recruit areas; recruiting more GPs from outside the UK, with recruits also placed in hard-to-recruit areas; a return to practice scheme to support GPs to return to work following a career break; and a flexible model whereby GPs agree to work with multiple practices in their local area. Despite all this, the number of full-time equivalent GPs has fallen over the last year, from 34,126 at the end of 2016 to 33,872 at the end of 2017. There was also variation in unfilled GP training places across the country in 2017. For example, in London the fill rate was 106%, but in the north-east it was 77%.22 NHS England also told us that it faces a particular issue with early retirement of GPs, caused in part by changes to the pensions system.23

9.Before the evidence session, we heard that trusts were increasingly looking to form subsidiary companies, partly to remove NHS contractual terms and conditions from any new non-clinical staff and thus make savings from lower salaries and pension contributions. We were told that these subsidiaries may also benefit from reduced tax liabilities. NHS Improvement explained that NHS foundation trusts have been able to establish subsidiary companies since 2006 where there are genuine commercial reasons for doing so, such as generating additional income. However, it told us that, to date, it has not been tracking these arrangements, and neither the Department nor NHS Improvement appeared aware of this trend. NHS Improvement committed to review its regulatory oversight of these subsidiaries.24

Support to financially challenged trusts

10.The Department and NHS Improvement told us about a small number of trusts that have particularly difficult financial situations and large underlying deficits. A series of assumptions and judgements are needed to calculate these underlying positions, on which the Department and NHS Improvement have not yet agreed a common approach. NHS Improvement accepted that underlying structural problems, such as large levels of debt, will take several years to resolve and that it needed to be realistic about how quickly these trusts can improve, and indicated that underlying structural problems, such as large levels of debt, will take several years to resolve. Since July 2016 NHS Improvement has placed the most financially challenged trusts into financial special measures. NHS Improvement appoints a director-led team to help produce and deliver recovery plans for the trust, with the aim of rapidly improving its financial performance. The Department told us that, for the fourteen trusts involved, finances had either improved or stabilised. The first eight trusts to be in financial special measures improved their financial position by the end of the 2016–17 financial year by £96 million compared with forecasts prior to the support.25

11.In contrast to the support provided to challenged trusts by NHS Improvement, the Department imposes a higher interest rate on loans for cash support that it gives to trusts in financial special measures, a rate of 6% compared to 1.5% for most other trusts. While this may discourage them from accessing additional financial support, it will limit how quickly these trusts can improve.26 The Department committed to reviewing how this high interest rate works as an incentive. It told us that for those trusts showing improvement against their plan, their loans have been refinanced to a lower interest rate.27

12.As well as high interest rates on loans, financially challenged trusts may struggle to secure funding designed to improve their financial sustainability. Trusts who missed their financial targets in 2016–17 received nothing from the Sustainability and Transformation Fund. But trusts with surpluses were well rewarded: 40% (£727 million) of Sustainability and Transformation Fund payments in 2016–17 created or increased trust surpluses rather than reducing the size of deficits any further. The Department told us that these larger surpluses make no difference to stability across the health system as these help balance deficits in other trusts.28

Transfers of capital to revenue budgets

13.Capital budgets cover many essential areas of spending, including maintaining buildings and keeping facilities up-to-date, rolling out new technologies and investing in new care models and the infrastructure needed to transform services. Since 2013–14, the Department has chosen to use money intended for capital projects in the NHS to cover a shortfall in the NHS revenue budget. In 2016–17, the Department transferred £1.2 billion of its initial £5.8 billion capital budget allocated to it by HM Treasury to revenue budgets to meet trusts’ day-to-day spending.29 The Department accepted that these transfers limit the NHS’s ability to transform services, and told us that it wants to eliminate such transfers by the end of this Parliament.30

14.When we last examined the financial sustainability of the NHS in February 2017, we were concerned that these repeated transfers of capital monies could result in ill-equipped and inefficient hospitals. We recommended that the Department, NHS England and NHS Improvement should review and improve national and local planning for capital expenditure.31 In its response in October 2017, the Department said it was continuing to seek improvements in planning for capital expenditure, but asserted that under the decentralised system NHS organisations draw up their own investment plans in line with local priorities and affordability.32 In the November 2017 Autumn Budget, the government committed the Department to reviewing and improving the rules that inform trusts’ use of capital funding, to help make sure that the NHS can maintain its facilities more effectively. In the session, the Department confirmed that it is just beginning this review, which will include looking at how it can avoid a backlog in maintenance building up again.33

15.In March 2017, an independent report by Sir Robert Naylor estimated that the NHS needs £10 billion in additional capital by 2020–21 to achieve its plans: £5 billion to address a backlog of maintenance work and £5 billion for transformation. In November 2017, the government announced an extra £3.5 billion of capital investment over the next four years.34 The Department told us that it was working with local organisations and partnerships on how to increase that investment, for example through disposal of estates.35

1 Report by the Comptroller and Auditor General, Sustainability and transformation in the NHS, Session 2017–19, HC 719, 19 January 2018

2 C&AG’s Report, para 2, Appendix One

3 Q 49; C&AG’s Report, paras 1.3–1.4, figure 3

4 Q 67; C&AG’s Report, para 8

5 NHS Improvement, Performance of the NHS provider sector for the month ended 31 December 2017, 21 February 2018; NHS England

6 Q 49; C&AG’s Report, paras 1,10, 3.4–3.5

7 C&AG’s Report, paras 10, 1.14, 1.16

8 Qq 52, 67

9 Qq 51, 65

10 Qq 2, 6

11 Qq 11, 17

12 Qq 6, 13

13 Qq 2–4, 21

14 Q 43; C&AG’s Report, para 11

15 NHS Providers (STN0008); C&AG’s Report, para 1.15

16 Q 41

17 Qq 2, 37

18 Qq 15, 18–20

19 Qq 18, 24; Royal College of Nursing (STN0009)

20 Qq 19, 25–26

21 NHS England, Monitor, Trust Development Authority, Health Education England, Public Health England, Care Quality Commission, Five Year Forward View, October 2014

22 Qq 35–36

24 Qq 129–136; Correspondence with NHS Improvement, dated 15 March

25 Qq 42–43, 48–49; C&AG’s Report, paras 1.19, 2.9

26 Qq 49–50; C&AG’s Report, para 2.10

27 Qq 73–74

28 Q 54; C&AG’s Report, paras 10, 1.10

29 Committee of Public Accounts, Financial sustainability of the NHS, Forty-third Report of Session 2016–17, HC 887, 27 February 2017; C&AG’s Report, para 1.18

30 Qq 41, 67

31 Committee of Public Accounts, Financial sustainability of the NHS, Forty-third Report of Session 2016–17, HC 887, 27 February 2017

33 Q 55; HM Treasury, Autumn Budget 2017, November 2017

34 Sir Robert Naylor, NHS property and estates: Naylor review, March 2017

35 Q 55; C&AG’s Report, para 3.15

27 March 2018