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NHS deficit will eat into transformation fund – threatening new models of care

Annual 2% efficiencies by 2020-21 would not be enough to close the funding gap, meaning providers must find savings of 4% next year and 3% in 2018-19 – but because such sustained efficiencies have never been achieved, money will have to be taken from the sustainability and transformation fund (STF) to balance NHS deficits in the meantime.

The stark revelations come in a new Nuffield Trust report, ‘Feeling the crunch’, which said even higher efficiency savings of 4% for this financial year would still leave providers with an underlying deficit of £2.35bn.

Reducing that deficit altogether would require further savings of 4% in 2017-18, followed by 3% efficiencies the year after – an unrealistic expectation considering sustained and recurrent efficiency savings have never been achieved to date, and one which would still require extra funds. Even if providers make cost savings of just 2% per year, the funding gap will still be around £6bn by the end of the decade.

But because the STF can only be spent once, using some of its cash to plug the deficit will result in little money left for transformational change that the NHS requires to modernise and reshape its services for the future, the Nuffield Trust said.

The think tank added that even if providers did manage to make these huge efficiencies, a sustainable balance can only be achieved by 2020-21 if commissioners also curb the rate at which NHS activity is growing by around a third. At present, activity is growing by an estimated 3.1% per year.

The catch-22 lies in the fact that the health system relies on service change and new models of care to curb this activity growth and treat patients more cheaply, but this will be “highly unlikely” without access to the STF.

“As such, the two tasks of huge provider efficiencies and successful commissioner investment in reducing demand growth need to happen in a timely and coordinated fashion,” the report said.

Part of the reason why providers are in deficit is because the rate they have been paid for procedures and treatments, which is set out by the national tariff, fails to cover their costs.

NHS England agreed to increase the tariff– which has been cut by 1.6% per year in cash terms over the last six years – “modestly” for this financial year. While this eases some of the pressure on providers, it will also “push commissioners into deficit for the first time in 2018-19”.

“When tariff cash prices are cut, commissioner buying power is increased above and beyond the headline increase in their allocations. But when tariff cash prices shift upwards, the reverse is true, and commissioner buying power is diminished,” the think tank said.

“If commissioners fail in their attempts to reduce the rate at which demand is growing, or if additional funding cannot be secured, the NHS will face some unpalatable decisions in order to curb the growth in activity and bring the books into balance.

“These could include extending waiting times for treatment, raising the threshold at which patients become eligible for treatment, cutting some services altogether, or closing whole sites or hospitals.”

Overall, the gradual cash increases in tariff prices, joined by the growing volume of care purchased, means that from 2018-19 onwards the core secondary care budget “will be insufficient to cover the tariff rate for the quantity of care provided”.

“That would mean that by 2019-20, over a third of the STF would be needed to subsidise commissioner costs under the tariff,” the report added, “while the remaining £2bn or so would be absorbed by provider deficits. No STF would be available for investment in 'service transformation'.”

The STF will form the financial framework for the sustainability and transformation plans (STPs), largely hailed as a panacea for many of the deep-seated economic and structural problems in the NHS, despite many finance directors thinking otherwise.

But the Nuffield Trust said STPs are being developed largely behind closed doors, with plans only expected to be signed off around October, as indicated by NHS England boss Simon Stevens.

In the meantime, a new ‘financial special measures’ regime is underway, but that is just “an attempt to stop the hole getting any deeper, rather than filling it”.

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