NHS funding has been increased to cope with the events of the last two years, but that can't last forever. Peter Saunders looks at when the stream of emergency funding will dry up and what can be done to prepare.

NHS funding and finance is the forgotten story of the last two years. It’s easy to overlook that the 2019/20 financial position across many hospitals was far from rosy.

The consolidated reported position for NHS providers showed that sector was around £1 billion in deficit, with many if not all claiming to have underlying deficits. £30-35 million is consistently the number quoted in my conversations, regardless of size.

A year on, things couldn’t be more different. The NHS has had the funding it needs to deal with the COVID-19 situation. Long derided and perverse payment systems based on activity and prices were suspended, with the internal market disappearing overnight.

Cash is awash across the system with finance directors and chief financial officers trying desperately to fill the sides of sofas and under mattresses with ‘rainy day’ accruals that meet the requirements of their auditors.

So, when will the NHS funding tap start to turn off? Sooner than you think….

The immediate future of NHS funding is uncertain

It's largely gone unnoticed outside of the NHS, but there's no funding settlement yet agreed between the Department of Health and Social Care (DHSC) and the Treasury for the second half of the financial year (H2).

I’m not suggesting for one minute that there will be an NHS funding issue – the anxiety over waiting lists, further coronavirus waves and variants, return of respiratory infections and swelling emergency numbers mean this would be political suicide. But there are noises and parked discussions that suggest there will be some form of compromise reached with the Treasury.

There is some confidence (albeit with a strain of anxiety) that H2 will be a smoothing, transition period back to some form of normality from April 2022. But, needless to say the insecurity and lateness of confirmation and guidance (said to be mid-September – a few weeks before H2) doesn’t help ease the uncertainty already oozing out of most boardrooms.

What will this mean for NHS finances?

Stripping out non-recurrent costs and funding

Planning tools issued by NHS England/Improvement (E/I) have attempted to strip out non-recurrent costs and funding from Trust baselines. That’s easier than it sounds.

Additional NHS funding allocations may have been clear, but the mix and sporadic phasing of funding along with the incentivisation of elective recovery still creates some murky waters. Less easy still is the identification of costs.

Even the most-diligent NHS Trust will hand on heart not be entirely sure of all of the costs resulting from coronavirus. And, in any case what is the new, normalised cost of delivering services? The continuing situation brings with it costs and limitations in productivity, which were simply not there before.

It's estimated that non-recurrent funding has, on average, been around 10% of a Trust’s turnover - £50 million for an average sized direct general hospital. And there is the legacy of the old financial regime – do we count the Provider Sustainability Fund and the Financial Recovery Fund as non-recurrent anymore?

What is for sure is that there will be some tightening of the NHS funding tap in H2, which makes it fundamental for all NHS trusts to understand and reset their ‘normalised baseline’.

Driving performance through elective recovery funding

The ratcheting up of the performance required to access additional NHS funding for elective recovery in July by NHS E/I was seen as a direct response to trusts performing and doing very nicely financially with the modest performance trajectories set. Given this, and the growing length of waiting lists, performance trajectories will, again, be increased and incentivised financially to deliver more activity.

With the inevitable challenging winter ahead, reductions in elective performance caused by increasing emergency admissions, sicker patients and with a workforce running on empty could have a detrimental impact on delivering NHS funding that many Trusts and systems will be hard coding into their financial plans.

The return of efficiency and productivity

The heat on cost efficiency and productivity was inevitably turned down during the last year. There has been a gentle movement back within allocations in H1, but the expectation is that this will again be increased for H2.

The cynic in me says the efficiency requirement will end up being the gap between the DHSC and Treasury numbers. Regardless of the level, there will be an ask and this will take planning and significant effort to deliver in a period which most commentators are already predicting will be difficult for the NHS.

Understanding the underlying position and its causes

The majority of acute trusts had underlying deficits in 2019/2020. Most of these are still likely to be there.

Stripping out the non-recurrent funding and costs and resetting efficiency and productivity plans will update the exit position. Some changes in care delivery (if maintained and sustainable), for example virtual consultations and changes in pathways in particular for emergency care, may well have impacted on the underlying position.

Understanding this and the causes and drivers is essential for Trusts and importantly Integrated Care Systems (ICS) as they accelerate to towards system allocations and funding.

What's next for NHS financial planning?

Throw this all in with short-notice guidance, a brief but intense planning cycle, inevitable operational challenges, and another major structural reorganisation, and you can see why many NHS managers won’t be looking forward to returning to work in September after their well-deserved summer breaks.

Whisper this quietly, but normal planning processes for 2022/23 will kick in by Christmas too. The NHS has never quite broken into a medium-term (let alone the desired long-term) planning cycle. Understandably given the challenges and uncertainty, the pandemic made this worse with quarterly and, at best, half-yearly cycles. However, the spending review in the Autumn may outline a three-year funding settlement for the NHS.

As we move to managed rather than emergency planning and potentially a three-year settlement from 2022 , it feels like it is time to finally try and make the shift to medium and long-term operational and financial planning, breaking the cycle of not just looking at the year ahead (or, as is currently, half-year) to multi-year plans.

This would give local NHS leaders a chance of developing realistic plans that deliver financial sustainability for their system. Once the ink is dry on H2 plans, then it feels this is the time to look at it.

ICS development and implementation will be at full pace, and wouldn't it be sensible to have a long-term financial plan for the system that aligns to population health, service transformation and place-based delivery plans?

And of course preparing for when the tap does get turned towards off in April 2022.

For support and guidance with NHS funding and financial management, contact Peter Saunders

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