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Report
by the Comptroller
and Auditor General

Department of Health & Social Care

NHS financial sustainability

HC 1867  SESSION 2017–2019  18 JANUARY 2019

Our vision is to help the nation spend wisely.
Our public audit perspective helps Parliament hold
government to account and improve public services.

The National Audit Office scrutinises public spending for Parliament and is independent
of government. The Comptroller and Auditor General (C&AG), Sir Amyas Morse KCB,
is an Officer of the House of Commons and leads the NAO. The C&AG certifies the
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leading to audited savings of £741 million in 2017.
Department of Health & Social Care

NHS financial sustainability

Report by the Comptroller and Auditor General

Ordered by the House of Commons
to be printed on 15 January 2019
This report has been prepared under Section 6 of the
National Audit Act 1983 for presentation to the House of
Commons in accordance with Section 9 of the Act
Sir Amyas Morse KCB
Comptroller and Auditor General
National Audit Office
14 January 2019

HC 1867 | £10.00
The report examined whether the NHS is on track to
achieve financial sustainability.

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 Contents
Key facts  4
Summary  5
Part One
Financial performance in the NHS  13
Part Two
Funding flows in the NHS  24
Part Three
Supporting local partnerships  35
Appendix One
Our audit approach  46
Appendix Two
Our evidence base  48
Appendix Three
Technical notes  51
The National Audit Office study team
consisted of:
Leon Bardot, Rosie Buckley,
Pablo Burns-Roa, Sergiu Cociu,
Fran Duke and Laura Wright, under
the direction of Robert White.
This report can be found on the
National Audit Office website at
www.nao.org.uk
For further information about the
National Audit Office please contact:
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If you are reading this document with a screen reader you may wish to use the bookmarks option to navigate through the parts.
4  Key facts  NHS financial sustainability

Key facts

£991m £1bn £3.2bn

combined deficit of capital budget extra funding given to
NHS trusts and NHS transferred to revenue trusts as interest-bearing
foundation trusts (trusts) budget in 2017-18 loans in 2017-18
in 2017-18

£21 million net deficit of NHS bodies (NHS England, clinical commissioning
groups (CCGs) and trusts) overall in 2017-18

£213 million combined deficit of CCGs in 2017-18

69% percentage of the combined deficit of trusts in 2017-18

accounted for by the 10 trusts with the largest deficits

75 CCGs reported overspends against their planned position

in 2017-18, up from 57 in 2016-17

32 number of the 44 sustainability and transformation partnerships

that had a financial deficit in 2017-18, when trusts’ and CCGs’
finances within the partnerships were added together

£558 million deficit forecast by the trust sector in 2018-19 based on the first
six months of the year

3.4% average annual real-terms growth in NHS funding in the five years,
2019-20 to 2023-24
 NHS financial sustainability  Summary 5

Summary

1 This is our seventh report on the financial sustainability of the NHS. To be

sustainable, the NHS needs to manage patient demand, including how long patients
wait, the quality and safety of services, and remain within the resources given to it.

2 The Department of Health & Social Care (the Department) has overall responsibility
for healthcare services. It is accountable to Parliament for ensuring that its spending,
as well as spending by NHS England, NHS Improvement, other arm’s-length bodies
and local NHS bodies, is contained within the overall budget authorised by Parliament.
The Department is responsible for ensuring that those organisations perform effectively
and have governance and controls in place to ensure that they provide value for money.
It has made NHS England and NHS Improvement responsible for ensuring that the
NHS balances its budget.

3 In our recent reports, in December 2015, November 2016 and January 2018,
we concluded that financial problems in the NHS were endemic and that extra in-year
cash injections to trusts had been spent on coping with current pressures rather than
the transformation required to put the health system on a sustainable footing. To address
this, local partnerships of clinical commissioning groups (CCGs), NHS trusts and NHS
foundation trusts (trusts) and local authorities were set up to develop long-term strategic
plans and transform the way services are provided more quickly. These partnerships
take the form of 44 sustainability and transformation partnerships covering England
(42 in 2018-19). Within these, there are 14 integrated care systems, in areas where
partnership working is most advanced.

4 In June 2018, the Prime Minister announced a long-term funding settlement for the
NHS, which will see NHS England’s budget rise by an extra £20.5 billion by 2023‑24.
Between 2019-20 and 2023-24, this equates to an average annual real-terms increase
of 3.4% (Figure 1 overleaf). The government asked NHS England to produce a 10-year
plan that aims to ensure that this additional funding is well spent. The government’s
priorities for the plan included: making progress towards achieving agreed waiting times;
improving cancer outcomes; better access to mental health services; better integration
of health and social care; and focusing on preventing ill-health. In January 2019, NHS
England and NHS Improvement published a long-term plan for the NHS. To support the
plan, NHS England and NHS Improvement is undertaking a fundamental restructuring
of the financial architecture supporting the NHS.
6  Summary  NHS financial sustainability

figure_stacked_bar_135mm

Figure 1
Growth in NHS funding, 2015-16 to 2023-24
From 2019-20 to 2023-24, NHS funding will increase by 3.4% a year on average in real terms

Annual real-terms change (%)

4.5

4 4.1

3.5 3.6
Average over the period = 3.4%

3 3.1 3.1
3.0 3.0

2.5 2.6

2
2
1.9
1.5

1
1.0

0.5 0.7

0
2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24

Funding settlement in place, 2017

Funding settlement announced in 2018

Notes
1 Covers growth in funding for NHS England only.
2 Future funding is based on NHS England’s 2018-19 budget of £113.8 billion plus an additional £0.8 billion funding for pay awards.
3 Percentages rounded to one decimal place.

Source: National Audit Office analysis of Department of Health & Social Care data

5 In return for this extra funding, the government has set the NHS five financial
tests to show how the NHS will do its part to put the service onto a more sustainable
footing. The NHS long-term plan sets out how the NHS aims to meet these tests:
(including providers) return to financial balance; achieve cash-releasing productivity
growth of at least 1.1% a year, with all savings reinvested in front-line care; reduce the
growth in demand for care through better integration and prevention; reduce variation
across the health system, improving providers’ financial and operational performance;
and make better use of capital investment and its existing assets to drive transformation.
 NHS financial sustainability  Summary 7

6 In this report on financial sustainability in the NHS, we:

• summarise the financial position of NHS England, CCGs and trusts (Part One);

• look at the financial flows and incentives in the NHS and whether these encourage
long-term financial sustainability (Part Two); and

• examine how local partnerships of health and care organisations are progressing,
and what the Department, NHS England and NHS Improvement are doing to
support them (Part Three).

7 We set out our audit approach in Appendix One, evidence base in Appendix Two,
and technical notes explaining how we have used financial data in Appendix Three.

Key findings

The funding settlement for the NHS long-term plan

8 The long-term funding settlement does not cover key areas of health
spending. The 3.4% average uplift in funding applies to the budget for NHS England
and not to the Department’s entire budget. The Department’s budget covers other
important areas of health spending such as most capital investment for buildings and
equipment, prevention initiatives run by Public Health England and local authorities,
and funding for doctors’ and nurses’ training. Spending in these areas could affect
the NHS’s ability to deliver the priorities of the long-term plan, especially if funding for
these areas reduces. The government will consider proposals in these areas as part
of its 2019 Spending Review. In addition, without a long-term funding settlement for
social care, local NHS bodies are concerned that it will be very difficult to make the
NHS sustainable (paragraphs 2.27 and 2.28).

9 There is a risk that the NHS will be unable to use the extra funding optimally
because of staff shortages. Difficulties in recruiting NHS staff presents a real risk that
some of the extra £20.5 billion funding will either not be used optimally (more expensive
agency staff will need to be used to deliver additional services) or will go unspent as
even if commissioners have the resources to commission additional activity, health care
providers may not have the staff to deliver it (paragraphs 1.19 and 2.29).

10 From what we have seen so far, the NHS long-term plan sets out a prudent
approach to achieving the priorities and tests set by the government, but a
number of risks remain. The long-term plan describes how the NHS aims to achieve
the range of priorities and five financial tests, set by the government in return for the
long-term funding settlement, which NHS England believes are stretching but feasible.
As with all long-term plans, it provides a helpful indicator of the direction of travel, but
significant internal and external risks remain to making the plan happen. These risks
include: growing pressures on services; staffing shortages; funding for social care
and public health; and the strength of the economy. Our reports have highlighted how
previous funding boosts appear to have mostly been spent on dealing with current
pressures rather than making the changes that are needed to put the NHS on a
sustainable footing (paragraphs 2.24 to 2.26).
8  Summary  NHS financial sustainability

Financial and operational performance of NHS bodies

11 In 2017-18, NHS commissioners and trusts reported a combined deficit of
£21 million. This was made up of:

• NHS England achieving an underspend of £1,183 million, 4.1% of the £28,572 million

available for its national functions and centrally commissioned services;

• CCGs together reporting an overspend of £213 million, 0.3% of the £80,964 million
available for locally commissioned services; and

• trusts reporting a combined deficit of £991 million, 1.2% of their total income of
£82,793 million (paragraph 1.4).

The combined deficit of £21 million does not include adjustments needed to report
against the Department’s budget for day-to-day resources and administration costs.

12 It is not clear that funding is reaching the right parts of the system.
The overspends by trusts and CCGs were broadly offset by the underspend by
NHS England. In 2017‑18, NHS England’s underspend included: £962 million from
non‑recurrent central programme costs, including efficiencies from vacancies;
a £280 million contribution to the risk reserve and £223 million from centrally
commissioned services, mostly specialised services (paragraphs 1.4 and 1.8).

13 Most of the combined trust deficit is accounted for by a small number of

trusts, while the number of CCGs in deficit increased in 2017-18. The net trust
deficit hides wide variation in performance between trusts, with 100 out of 232 trusts
in deficit. In 2017-18, 69% of the total trust deficit was accounted for by 10 trusts. NHS
Improvement has committed to returning the trust sector to balance in 2020-21, but it
is difficult to see how this will be achieved for the worst-performing trusts under current
arrangements. Although support provided to trusts in NHS Improvement’s financial
special measures programme has been successful in improving the position of some
trusts (by £49 million in 2017-18), the financial performance of the 10 worst-performing
trusts deteriorated significantly in 2017-18. Between 2016-17 and 2017-18, the number
of CCGs reporting overspends against their planned position increased from 57 to 75.
The NHS long-term plan sets out the national bodies’ aim that no NHS organisation is
reporting a deficit by 2023-24 (paragraphs 1.6 and 1.11).

14 There are indications that the underlying financial health in some trusts
is getting worse. In 2017-18, trusts reported that their combined underlying deficit
was £4.3 billion, or £1.85 billion if the Provider Sustainability Fund (which replaced
the Sustainability and Transformation Fund in 2018-19) is allocated to trusts in future
years. There is no historical data on the underlying deficit that takes account of one‑off
savings, emergency extra cash and other short-term fixes that boost the financial
position of the NHS, so it is not clear whether this position is getting better or worse.
However, indicators such as cash support and one-off efficiency savings suggest the
position has not improved. For example, in 2017-18, the Department gave £3.2 billion
in loans to support trusts in difficulty, up from £2.8 billion in 2016-17. In 2017-18, 26% of
trusts’ savings were one-off. Trusts will need to make additional savings in 2018-19 to
replace these one-off savings (paragraphs 1.13, 1.14, 2.13, 2.17 and 2.18).
 NHS financial sustainability  Summary 9

15 Patient waiting times continue to slip. Overall, the NHS has continued to
deliver increasing activity, but performance against key access standards has steadily
declined since 2012-13 and fell further in 2017-18. For example, while more than 200,000
additional patients were treated in A&E within four hours, performance against the target
that 95% of patients should be seen within four hours fell to 88% (from 92% in 2015-16
and 89% in 2016-17). NHS England is undertaking a clinically led review to consider
the current performance standards. However, even though the NHS has treated nearly
1.5 million more non-urgent patients than in 2012-13, there are now 4.1 million patients
on waiting lists for non-urgent treatment (up from 2.5 million in 2012-13). We estimate
that it would cost an additional £700 million to reduce the waiting list to the level last
seen in March 2018, based on current trends. However, trusts told us that even with
extra funding, it is unlikely they will meet performance standards, because of difficulties
in recruiting staff (paragraphs 1.15 and 1.19).

Funding flows
16 The current funding flows in the NHS are complicated and do not support
partnership working, integration and the better management of demand.
For example, NHS tariff payments incentivise more activity in an acute (hospital) setting,
while block contracts with community trusts provide an incentive for costs outside of
hospital settings to remain as low as possible. The national tariff allows providers and
commissioners to agree alternative payment arrangements with different incentives
and allocations of risk. In addition, several ‘add on’ financial mechanisms have been
introduced in recent years to provide incentives for the NHS to achieve emerging
priorities. These have made the financial structures and mechanisms of the NHS more
complex. We have previously reported that NHS England and NHS Improvement could
do more to create the right incentives for NHS bodies to collaborate. NHS England
and NHS Improvement have taken action intended to address this, including changes
to centrally-managed support funds announced in the NHS long-term plan. However,
not all details of the financial reforms are yet known, for example, levels of capital funding
for investing in assets (paragraphs 2.3 to 2.8).

17 Sustainability and Transformation Fund payments have helped most trusts

improve their reported performance but encourage short-term gains over long‑term
sustainability. The Department initially intended that the Fund would return trusts to
aggregate financial balance and give the NHS the stability to improve performance and
transform services. However, NHS England and NHS Improvement later clarified that
the Fund’s objective was to support the trust sector to achieve its target deficit position
(£580 million in 2016-17 and £496 million in 2017-18). To incentivise improvements,
NHS England and NHS Improvement have set financial targets (control totals) that trusts
must meet to access the Fund. The funding has helped most (210 of 232) trusts improve
their reported performance. In 2017-18, 46% of fund payments helped trusts reduce or
eliminate their in-year deficits. However, the remaining 54% created or increased trust
surpluses. This has driven disparity between trusts and the trust sector failed to achieve
its target deficit position again in 2017-18. Trusts told us that the Fund had encouraged
them to prioritise short-term gains over longer-term financial sustainability, so that they
would meet their control totals in that year, and to prioritise their own financial gains at
the expense of collaborating with other local bodies (paragraphs 2.11 to 2.13).
10  Summary  NHS financial sustainability

18 Capital budgets have been repeatedly raided to support revenue spending.

Investment in capital is essential for maintaining quality of care and achieving the
transformation required for the NHS to be sustainable in the longer term. Since
2014‑15, the Department has used money originally intended for capital projects to
cover a shortfall in the revenue budget to fund day-to-day services (£1 billion of its
£5.6 billion capital budget in 2017-18). This followed transfers of £1.2 billion in 2016-17
and £950 million in 2015-16. The Department plans to transfer £0.5 billion in 2018-19,
£0.25 billion in 2019-20, and intends to stop this practice from 2020-21. The reduction
in these transfers has been accompanied by a rise in the annual capital budget available
since 2016-17; £1.3 billion more in 2018-19 than 2016-17. Between 2016-17 and 2017‑18,
the maintenance backlog across all NHS trusts grew by 9% to £6 billion. Trusts and
commissioners raised concerns about access to capital funding including inequitable
access, and slow and resource-intensive processes. The Department is undertaking a
review of NHS capital, which will feed into the capital settlement in the 2019 Spending
Review (paragraphs 2.20 to 2.23).

Supporting local partnerships

19 Many parts of the NHS do not have sufficient understanding of increasing
levels of demand for services. Local bodies need a good understanding of the
reasons for increasing activity to manage this demand. Regional offices of the national
bodies also need a good understanding to support local bodies to manage demand
and gain assurance that they are managing demand effectively. However, it is difficult to
predict and quantify all variation in demand because of the complex nature of healthcare
and drivers of demand. Some initiatives led by national bodies, such as RightCare,
have helped to improve local understanding of the factors that drive local variations in
changes in demand. However, local partnerships had mixed views about the extent
to which they understood what was driving demand in their areas. They noted that
combining data from across local bodies, including health and local government, would
help to provide a better understanding of demand pressures. NHS England and NHS
Improvement are working with partnerships to develop their expertise in understanding
demand (paragraphs 3.9 to 3.12).

20 It is difficult to say how much progress has been made by local partnerships
across the system. The local partnerships we spoke to are clearly making progress
in developing a system-level vision, and in planning and delivery, but are still at very
different stages of development. Most areas noted that the pace of change was slow
in transforming the way services are provided, with few having yet reached the stage
where major service reconfiguration had taken place. However, it is difficult to assess
the collective progress of partnerships across England, because NHS England and
NHS Improvement have yet to repeat their baseline assessment of sustainability and
transformation partnerships’ progress, published in July 2017. National bodies plan to
develop a new accountability and performance framework for integrated care systems.
To support the NHS long-term plan, local partnerships will develop five-year plans by
autumn 2019, which aim to set out how they intend to improve services and achieve
financial sustainability (paragraphs 3.5 and 3.6, and Figure 12).
 NHS financial sustainability  Summary 11

21 Partnership working is vulnerable, given that partnerships are not statutory

bodies and face significant challenges. Three-quarters of partnerships have a deficit
when the finances of their constituent trusts and CCGs are added together. Even the
most advanced partnerships face significant challenges in managing demand within the
resources available. The areas we visited all reported making progress on partnership
working within the existing legal framework. However, the need for organisations to
meet their own statutory requirements may hinder partnership working. Partnerships are
not statutory bodies supported by a legislative framework, and so require the goodwill
of all involved. Continued financial pressure will test this goodwill. National bodies, in
discussion with NHS colleagues, have developed a provisional list of potential legislative
changes for Parliament’s consideration to support better integration in the best interest
of patients (paragraphs 3.7 and 3.8).

22 More progress is needed in the joined-up approach to regulation that NHS

England and NHS Improvement are adopting. It is important that the regulators work
closely together otherwise local NHS bodies will be faced with mixed messages and
competing priorities. NHS England and NHS Improvement have continued to integrate
more of their functions. For example, as well as creating several joint regional posts,
such as regional directors, there will be a single chief finance officer, nursing officer
and medical director at a national level. Local bodies told us that NHS England and
NHS Improvement are making progress in holding systems rather than organisations
to account. However, they added that they still receive mixed messages from the two
organisations, especially when financial pressures emerge, and regulators may revert
to organisation-based working. NHS England and NHS Improvement plan to implement
a new shared operating model that aims to support the delivery of the NHS long-term
plan (paragraphs 3.15 and 3.16).

Conclusion on value for money

23 This report covers 2017-18, so we first conclude on financial sustainability for
that year. We consider that the growth in waiting lists and slippage in waiting times,
and the existence of substantial deficits in some parts of the system, offset by surpluses
elsewhere do not add up to a picture that we can describe as sustainable. Recently,
the long-term plan for the NHS has been published, and government has committed
to longer-term stable growth in funding for NHS England.

24 In our view these developments are positive, and the planning approach we have
seen so far looks prudent. We will really be able to judge whether the funding package
will be enough to achieve the NHS’ ambitions when we know the level of settlement for
other key areas of health spending that emerges from the Spending Review later in the
year. This will tell us whether there is enough to deal with the embedded problems from
the last few years and move the health system forward. Let’s hope there are not too many
strings attached.
12  Summary  NHS financial sustainability

Recommendations
25 These recommendations aim to support national bodies to ensure that the
additional funding supporting the NHS long-term plan is spent wisely, and that financial
rigour is maintained over this funding settlement period.

a The national bodies should test whether local plans to manage demand are
realistic. Commissioners and trusts now set out the drivers of activity growth
between years in their operational plans. The national bodies should test whether
local bodies have identified all their local drivers in their plans and have sufficient
capacity to meet demand. A better understanding of drivers should allow them
to better support local bodies in managing demand and ensure that funding is
targeted at the right areas.

b As part of current reforms, NHS England and NHS Improvement should design
and implement a simpler payment system. This system should be better aligned
with the new structures in the NHS, reduce transaction costs and promote greater
collaboration and better management of demand. National bodies need to identify
the behaviours they want to encourage in local bodies and ensure that the payment
system and other incentives encourage these behaviours. They should set out a
medium-term strategy for redesigning tariffs as part of a wider statement of any
intended reform of how money flows around the NHS in relation to demand and costs.

c The national bodies should review local plans to ensure consistency with
the national long-term plan. Once local health systems have developed their
five‑year plans, national bodies should assess whether these are consistent with
the long‑term plan, ensuring key risks to delivery are identified and mitigating action
put in place to address these risks.

d The Department and NHS Improvement should develop a sustainable

long‑term plan for supporting the worst financially performing trusts. Current
support and incentives will not alone be sufficient to return these trusts to financial
balance. The Department and NHS Improvement should review the underlying
cause of the problems experienced by trusts in severe financial difficulty and the
Department could consider whether it should restructure the balance sheets in
those trusts where there is little or no prospect of loans being repaid.

e The national bodies’ review of how capital is allocated needs to ensure

that investment is available for essential modernisation of health services.
This review should examine how arrangements for accessing capital can be made
simpler for all NHS bodies regardless of their financial position or statutory basis
and consider mechanisms for targeting capital in the most effective ways.

f NHS England and NHS Improvement should review how their regulatory and
oversight approach is supporting collaborative working locally. This should
include reviewing the changes necessary to support the development of integrated
care systems if the legislative changes proposed in the long-term plan are not
brought in. NHS England and NHS Improvement should also publish an update
on the progress being made by partnerships on integration and system-working.
 NHS financial sustainability  Part One  13

Part One

Financial performance in the NHS

1.1 This part of the report examines the financial position and performance of the
NHS overall and of NHS bodies (clinical commissioning groups (CCGs), NHS trusts
and NHS foundation trusts (trusts)). We also look at how trusts have performed against
access standards.

1.2 Since 1974-75, health spending in real terms has increased by 3.7% a year on
average in England.1 Between 2015-16 and 2018-19, NHS England received smaller
increases, averaging 2.4% a year. Funding constraints, coupled with an ageing
population and higher demand for care, have increased pressures on the health
system. In June 2018, the Prime Minister announced a long-term funding settlement
for the NHS, which will see NHS England’s budget rise by an extra £20.5 billion by
2023-24. Between 2019-20 and 2023-24, this equates to an average annual real-terms
increase of 3.4% (Figure 1 on page 6). The funding will be front-loaded with an increase
of 3.6% in the first year, which means £4.1 billion extra in 2019-20. In January 2019,
NHS England and NHS Improvement published a long-term plan for the NHS that aims
to ensure that this additional funding is well spent.2 In its 2018 Autumn Budget, the
government also announced an additional £1.25 billion adjustment to NHS England’s
budget to cover unavoidable increased costs of NHS staff pensions.

NHS funding and spending in 2017-18

1.3 Most of the funding allocated to the Department of Health & Social Care
(the Department) is given to NHS England to plan and pay for NHS services.
In 2017‑18, this amounted to £109.5 billion.3 Most of NHS England’s budget was
spent by 207 CCGs, which purchased healthcare services from 232 NHS trusts.4
These trusts deliver acute, community, ambulance, specialist and mental health
and disability services. Figure 2 overleaf summarises the financial performance
of CCGs and trusts in 2017-18.

1 Historic health spending was measured using total health spending by the Department of Health.
2 NHS England, The NHS Long Term Plan, January 2019.
3 The £109.5 billion excludes the depreciation ring-fence, see table 35 in the Department’s Annual Report and Accounts.
4 Number of organisations at 31 March 2018.
14  Part One  NHS financial sustainability

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Figure 2
Summary of financial performance of clinical commissioning groups (CCGs) and trusts, 2017-18

Department of Health & Social Care

Allocation to NHS England from the Department £109,536m

NHS England

Payment for services NHS England directly Clinical commissioning groups

commissions from trusts

Trusts

Planned expenditure/income Underspend/overspend Underspend/overspend

2017-18 2017-18 2016-17
(£m) (£m) (£m)
Centrally commissioned services, 28,572 1,183 underspend 748 underspend
including primary care, specialised (surplus) (surplus)
services and public health

Clinical commissioning groups 80,964 213 overspend 154 underspend

(deficit) (surplus)

Trusts 82,793 991 overspend 791 overspend

(deficit) (deficit)

Net underspend/overspend by 21 overspend 111 underspend

NHS commissioners and trusts (deficit) (surplus)

Notes
1 NHS England’s total revenue budget (including depreciation and impairment charges) was £109,702 million. The core measure for NHS England’s
financial performance is its non-ring-fenced revenue budget of £109,536 million, which excludes depreciation and impairment charges.
2 Trusts generate income as opposed to receiving ‘allocations’. This is because they work on a more commercial basis than NHS England and CCGs,
which work within an annual resource limit.
3 Trusts receive income from CCGs, NHS England and other trusts, including from services provided to other trusts. The gross income from all these
sources was £82,793 million.
4 NHS England and CCGs also buy healthcare services from other providers.
5 Spend on centrally commissioned services includes underspends or overspends on the legacy NHS continuing healthcare claims programme.
6 These figures exclude any central accounting adjustments that the Department makes when reporting its total revenue position to Parliament.

Source: National Audit Office analysis of Department of Health & Social Care, NHS England and NHS Improvement data
 NHS financial sustainability  Part One  15

1.4 Overall, the commissioner and trust sectors ended 2017-18 with a deficit of
£21 million.5 This was worse than last year, in which a £111 million surplus was recorded.
The deficit in 2017-18 was made up of:

• NHS England reporting an underspend of £1,183 million, 4.1% of the £28,572 million
available for national functions, centrally commissioned services and legacy claims;

• CCGs reporting an overspend of £213 million, 0.3% of the £80,964 million available
for locally commissioned services; and

• trusts reporting a combined deficit of £991 million, 1.2% of their income of

£82,793 million.

Trends in the financial performance of CCGs

1.5 The financial performance of CCGs is measured against the planned position
at the end of the financial year agreed between each group and NHS England.
Any differences between the actual and planned position are reported as either
underspends or overspends. In 2017-18, the £213 million overspend was made up of:

• a collective overspend of £321 million on locally commissioned services

(compared with an underspend of £117 million in 2016-17);

• an underspend of £71 million on the Quality Premium programme

(compared with an underspend of £34 million in 2016-17);6 and

• technical adjustments of £37 million, which NHS England makes for reporting
purposes (compared with £4 million in 2016-17).

1.6 CCGs’ performance was worse in 2017-18 than in 2016-17:

• 132 CCGs had either a balanced position or reported underspends totalling

£247 million, compared with 152 in 2016-17 being in balance or reporting
underspends totalling £476 million; and

• 75 CCGs reported overspends totalling £568 million, compared with 57 in 2016-17

reporting overspends totalling £359 million.7

Significant issues with generic drug pricing set by the Department, which were outside the
control of local NHS organisations, resulted in an addition cost of £349 million to CCGs.

5 The trusts’ deficit position does not include £47 million in adjustments needed to report against the Department’s
budget for day-to-day resources and administration costs, including adjustments relating to income and depreciation
of donated assets, private finance initiative spending and provisions.
6 This programme rewards CCGs for improving the quality of the services they commission and for associated
improvements in health outcomes.
7 We have defined a balanced position as the difference between the actual and planned positions being zero,
to the nearest £1,000. This will include any CCG in each year with an overspend of less than £500.
16  Part One  NHS financial sustainability

1.7 In 2017-18, NHS England required each commissioner to hold 0.5% of their
allocation in a reserve (1% in 2016-17), in case it was needed to offset deficits in the
NHS. NHS England restricted CCGs from using the reserve, which was used to improve
the financial position by about £640 million (£360 million from CCGs and £280 million
from NHS England’s central programmes).

1.8 In 2017-18, NHS England underspent by £1,183 million against its central and direct
commissioning budget (excluding CCGs), a five-fold increase since 2013-14 (Figure 3).
It achieved this by spending:

• £962 million less than planned on programmes, administration and other central
budgets, for example by delaying funding for transformation, not filling staff
vacancies and not allocating some £25 million of winter pressure money to trusts;

• £223 million less than planned on direct commissioning, including for specialised
services, where, for example, controls have been put in place regarding the
Cancer Drugs Fund; and

• £2 million more than planned on legacy NHS continuing healthcare claims.8

The underspend was used to offset the deficits in local NHS bodies.

Trends in financial performance of trusts

1.9 In 2017-18, NHS England and NHS Improvement continued with the measures
introduced in the July 2016 NHS ‘financial reset’ plan, which aimed to reduce trusts’
deficits and strengthen accountability. These measures included the £1.8 billion a year
Sustainability and Transformation Fund, which trusts could access if they accepted and
achieved the financial targets (control totals) given to them by NHS Improvement.

1.10 Despite these initiatives, the combined trust deficit continued to grow from
£791 million in 2016-17 to £991 million in 2017-18 (Figure 4 on page 18). At the end of
September 2018, trusts reported a combined deficit of £1,229 million and a forecast
deficit for 2018-19 of £558 million, when the uncommitted Provider Sustainability Fund
was included. This fund replaced the Sustainability and Transformation Fund in 2018-19.

8 NHS continuing healthcare provides free care outside of hospital that is arranged and funded by the NHS. CCGs
now provide funding, but NHS England is responsible for claims made before the healthcare system was reorganised
following the Health and Social Care Act 2012.
 NHS financial sustainability  Part One  17

line_chart_table_175mm

Figure 3
NHS England’s central and direct commissioning underspend, 2013-14 to 2017-18
NHS England’s underspend has increased significantly in recent years

Underspend (£m)
1,400

1,200

1,000

800

600

400

200

0
2013-14 2014-15 2015-16 2016-17 2017-18
NHS England underspend 237 214 614 748 1,183

Note
1 Figures are underspends on NHS England’s non-ring-fenced revenue budget and do not include performance relating to ring-fenced depreciation,
amortisation and impairments.

Source: National Audit Office analysis of NHS England data

1.11 The combined trust deficit hides the wide variation in performance between trusts
from a £77 million surplus to a £141 million deficit, with 100 out of 232 trusts in deficit.
In 2017-18, the 10 worst-performing trusts reported a combined deficit of £758 million,
representing 12% of their income and 69% of the total trust deficit.9 This was up from
a £400 million deficit that these trusts reported in 2016-17, representing 6% of their
income. Although support provided to trusts in NHS Improvement’s financial special
measures programme has been successful in improving the position of some trusts
(by £49 million in 2017-18), the financial performance of the 10 worst-performing
trusts has been deteriorating over several years, with significant deterioration in
2017‑18. This indicates that current plans to return these trusts to financial balance
are not working. In addition, the proportion of trusts in deficit remained the same
(43%) in 2017‑18 as in 2016-17, suggesting that the gulf between the best and worst
performers is increasing. NHS Improvement has committed to returning the trust sector
to balance in 2020-21. The NHS long-term plan also sets out the national bodies’ aim
that no NHS organisations are reporting a deficit by 2023-24.

9 A total trust deficit of £1,095 million was used for this calculation. This is the total of individual trust deficits prior to the
central adjustments made that give the combined trust deficit of £991 million reported in the Department’s accounts.
18  Part One  NHS financial sustainability

figure_stacked_bar_135mm

Figure 4
Surplus/deficit of trusts, 2010-11 to 2017-18, and forecast for 2018-19
The financial position of trusts worsened in 2017-18

Surplus/deficit (£000)
1,000

500
513 483 592
0
-91
-558
-859 -791
-500 -991

-1,000
-2,447

-1,500

-2,000

-2,500

-3,000

-3,500
2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19
forecast
Surplus/deficit
Sustainability and transformation payments

Notes
1 Sustainability and Transformation Fund payments totalled £1,796 million in 2016-17 and £1,793 million in 2017-18.
2 Forecast for 2018-19 is based on expected full-year outturn at the end of quarter 2.

Source: National Audit Office analysis of trusts’ financial data

1.12 The financial position and performance of acute trusts are worse than those of
other types of trusts (Figure 5). For example, in 2017-18, acute trusts had more than
£1 billion in net current liabilities and a combined deficit of £1.7 billion, whereas mental
health trusts had net current assets of £898 million and a surplus of £307 million.
In 2014‑15, acute trusts reported £526 million in net current assets; in 2017-18, they
reported £1,069 million in net liabilities. These trusts may have fewer reserves that they
can easily draw on in times of need, increasing the risk that they will need financial
support from the Department.
 NHS financial sustainability  Part One  19

Figure XX Shows...

Figure 5
Average current assets, liabilities and surplus/deficit by trust type
for 2017-18, as at 31 March 2018
The financial position and performance of acute trusts are worse than those of other types of trusts

Trusts Average Average cash Average Average Average Surplus/(deficit)

current and cash current net assets/ surplus/ as a percentage
assets equivalents liabilities (liabilities) (deficit) of income
(£m)1 (£m) (£m) (£m) (£m) (%)
Acute 46 17 (71) (8) (13) (2.8)

Mental health 17 28 (28) 17 6 2.5

Specialist 39 26 (38) 27 16 7.1

Community 12 17 (19) 10 3 1.8

Ambulance 17 23 (30) 10 4 1.5

Notes
1 Figures exclude cash and cash equivalents.
2 Surplus or deficit figures include payments from the Sustainability and Transformation Fund.

Source: National Audit Office analysis of trusts’ financial data

The underlying health of the NHS

1.13 The underlying deficit of the NHS provides an indication of the longer-term financial
health of the NHS. This figure takes account of one-off savings, emergency extra cash
and other short-term fixes that boost the financial position of the NHS. For 2017‑18,
trusts self-reported that they ended the year with an underlying deficit of some
£4.3 billion, using a methodology developed by NHS Improvement.10 The underlying
deficit will be £1.85 billion if the Provider Sustainability Fund is allocated to trusts in future
years. As 2017-18 was the first year that NHS Improvement reported the underlying
deficit, it is not possible to say whether the position is improving.

10 Trusts calculated their underlying deficit as their surplus or deficit in 2017-18, less any income and expenditure not
expected to occur in future years, plus any income and expenditure expected to reoccur consistently in future years.
20  Part One  NHS financial sustainability

1.14 One component of the underlying deficit is the level of one-off savings. Financial
sustainability relies on local NHS bodies making year-on-year savings, rather than
one‑off savings. Otherwise, these bodies will have to find new savings the following
year, to replace any one-off savings, in addition to savings already planned. Examples
of one‑off savings include leaving staff posts temporarily vacant and selling surplus
buildings and land to generate income. In 2017-18:

• trusts saved £3,210 million, 3.5% more than in 2016-17, but only 87% of the savings
they planned (Figure 6). The proportion that came from one-off savings increased
to 26%, up from 25% in 2016-17 and 22% in 2015-16; and

• CCGs made £2,486 million of savings, 25% more than in 2016-17, but only 80%
of the savings they planned (Figure 6). The proportion that came from one-off
savings was 10%, down from 17% in 2016-17 and the same as in 2015-16.

Achieving NHS performance standards and quality requirements

1.15 Figure 7 on page 22 shows that NHS performance against key standards has
steadily declined since 2012-13 in most areas. For example, only 88% of accident and
emergency patients were seen within four hours in 2017-18, against a target of 95% and
a rate of 92% in 2015-16 and 89% in 2016-17. Individual trusts’ performance ranged from
71% to 100%. However, NHS data suggest performance has improved in some areas.
For example, waiting time standards for the improving access to psychological therapies
(IAPT) mental health programme have been met since their introduction in 2014-15.
NHS England is undertaking a clinically led review to consider the current performance
standards. Between April 2017 and March 2018, the number of patients on waiting
lists for non-urgent treatment continued to increase, from 3.7 million to 4.1 million.
We estimate that it would cost an additional £700 million to reduce the waiting list
to the level last seen in March 2018, based on current trends.

1.16 High levels of bed occupancy, length of stay and delayed discharges from hospital
are also affecting trusts’ ability to meet performance standards. In June 2018, general
and hospital bed occupancy rates were at 93%, up from 91% in June 2017. In July 2017,
NHS England and NHS Improvement recommended that bed occupancy should remain
below 92%. Our analysis shows that trusts with higher bed occupancy rates perform
worse against the target that patients should be treated within 18 weeks of referral.

1.17 Long-stay patients account for 8% of admissions requiring an overnight stay and
have an average length of stay of 40 days. Nearly 350,000 patients spend more than
three weeks in an acute hospital each year. The NHS plans to reduce the number of
beds occupied by long-stay patients in acute hospitals by 25% by December 2018,
freeing up at least 4,000 beds compared to 2017-18. In the three months to September
2018, the number of occupied long-stay beds was 16,832 against a baseline of 19,301,
a 13% reduction.
 NHS financial sustainability  Part One  21

figure_stacked_bar_135mm

Figure 6
Savings planned and achieved by trusts and CCGs, 2013-14 to 2017-18, and planned for 2018-19
Trusts typically deliver between 85% and 90% of their planned savings and clinical commissioning groups (CCGs) typically deliver
between 80% and 86% of their planned savings

Trusts

Savings (£m) Proportion of plan achieved (%)

6,000 100

5,000
80

4,000
60

3,000

40
2,000

20
1,000

0 0
2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 plan
Planned savings (£m) 3,295 3,316 3,209 3,368 3,687 3,577
Actual savings (£m) 2,972 2,804 2,897 3,101 3,210
Proportion of planned 90 85 90 92 87
savings achieved (%)

Clinical commissioning groups

Savings (£m) Proportion of plan achieved (%)

6,000 100

5,000
80

4,000
60

3,000

40
2,000

20
1,000

0 0
2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 plan
Planned savings (£m) 1,636 1,610 1,743 2,438 3,107 2,739
Actual savings (£m) 1,407 1,378 1,481 1,990 2,486
Proportion of planned 86 86 85 82 80
savings achieved (%)

Source: National Audit Office analysis of NHS England and NHS Improvement data
22  Part One  NHS financial sustainability

Figure XX Shows...

Figure 7
Trusts’ performance against key waiting times standards
NHS performance against key waiting times standards has steadily declined since 2012-13

Percentage point difference to waiting times standards 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18
A&E: 95% of patients should be admitted, transferred, or 0.9 0.7 -1.4 -3.1 -5.9 -6.7
discharged within four hours of arrival in accident and emergency

Cancer: 85% of patients referred via the urgent suspected 2.2 1.0 -1.6 -2.6 -3.0 -2.7
cancer route should start definitive treatment within 62 days of
receipt of referral at hospital

Routine, non-urgent conditions: 92% of patients should start 2.2 1.7 1.1 -0.5 -1.7 -4.8
their treatment within 18 weeks of being referred

Improving access to psychological therapies (IAPT): 95% of – – – 1.3 3.2 3.8

people referred to IAPT service should start treatment within
18 weeks of referral

Ambulance: 75% of Red 1 calls should result in an emergency -1.0 0.6 -3.1 -2.5 -6.3 -5.7
response arriving within 8 minutes2

Diagnostic: Less than 1% of patients should wait six weeks or 0.0 -0.1 -0.8 -0.8 -0.4 -0.9
longer for a diagnostic test from referral

Notes
1 Figures for accident and emergency departments (A&E), cancer, ambulance and diagnostic are annual data. Figures for routine, non-urgent conditions are
reported performance at the end of March each year.
2 By December 2017, all ambulance trusts (except the Isle of Wight) had switched to a new categorisation of calls.

Source: National Audit Office analysis of NHS England data

1.18 Overall, trusts have made progress in reducing delayed discharges from hospital.
Between March 2017 and March 2018, more than 30,000 hospital bed days were
released by reducing the number of delayed hospital discharges. However, overall bed
occupancy has been affected by delays in transferring patients to care in other settings,
including social care. Between January 2018 and March 2018, 446,000 bed days
across hospital, community and mental health trusts were occupied by patients whose
discharge from hospital had been delayed (approximately 4.2% of all beds).

1.19 Trusts told us that even with extra funding, it is unlikely they will meet their
performance standards, because of difficulties recruiting staff. In September 2018, trusts
had 41,000 vacancies for nurses (11.6% vacancy rate) and more than 9,000 vacancies
for medical staff (7.4% vacancy rate). Vacancy rates vary widely between regions.
For example, in September 2018, the nurse vacancy rate was 14.6% in London and
9.3% in the North of England.
 NHS financial sustainability  Part One  23

Providing quality services

1.20 Poor financial performance can affect the quality of a trust’s clinical services
and may reflect poor leadership. The Care Quality Commission aims to “monitor and
inspect services to see whether they are safe, effective, caring, responsive and well‑led”.
It produces ratings against these five inspection areas as well as an overall quality rating.
We found a correlation between trusts’ well-led rating and trusts’ financial performance
in 2017-18. Trusts with a larger deficit tended to have a poorer well-led rating.
24  Part Two  NHS financial sustainability

Part Two

Funding flows in the NHS

2.1 In this part, we examine how the financial flows and funding mechanisms
encourage long-term financial sustainability of local NHS bodies (Figure 8). We do not
cover funding for primary care, public health or adult social care, which all have an
impact on the financial sustainability of local NHS bodies.

Revenue funding
2.2 Revenue funding covers the day-to-day spending that is required to operate
an organisation, such as on staff costs. NHS trusts and NHS foundation trusts
(trusts) receive most of their revenue funding (82%) from NHS England and clinical
commissioning groups (CCGs) to provide NHS healthcare. Trusts also receive income for
non-healthcare activities, such as providing education and training, providing non-patient
care services for other bodies and undertaking research and development.

2.3 Payment mechanisms do not currently support the move to partnership working,
moving more activity out of hospitals, or long-term financial sustainability:

• Most acute services are covered by the ‘payment by results’ framework, whereby
commissioners pay trusts for each unit of care, with NHS tariff prices set nationally.
These incentivise trusts to provide more activity in an acute setting in response to
demand but create additional financial pressures for commissioners. The national
tariff does allow providers and commissioners to agree alternative payment
arrangements with different incentives and allocations of risk.

• Most community and mental health trusts are paid through block contracts,
which pay fixed payments that are not related to the number of patients treated.
They do not incentivise trusts to increase activity or invest in out-of-hospital
services, although these services may be the most cost-effective way of
treating patients.

• Acute trusts bear the financial risk of meeting non-elective demand and higher
costs of delivery without being able to incentivise delivering care in more
cost‑effective settings.
 NHS financial sustainability  Part Two  25

<No data from link>

Figure 8
Funding flows in the NHS

Department of Health & Social Care

NHS England

Clinical commissioning groups (CCGs) Local authorities

Trusts

Specialised Acute Ambulance Community and mental health

Types of revenue contract (percentage of total value of contracts in 2018-19):

• payments by results: which pays for the volume of activity (58%);

• block: with a fixed payment, irrespective of the volume of activity (33%); and

• risk-share contract: where the financial risk is shared between the commissioner and trust (9%).

A number of additional financial mechanisms to provide incentives for the NHS to achieve emerging priorities have made
the financial structures already in place more complicated. These include:

• the Sustainability and Transformation Fund;

• Commissioning for Quality and Innovation (CQUIN) – makes a proportion of trusts’ income conditional on demonstrating
improvements in quality and innovation in specified areas of patient care agreed between the trust and CCG;

• the commissioner quality premium – rewards CCGs for improving the quality of the services they commission and for
associated improvements in health outcomes;

• the marginal rate emergency tariff – CCGs only pay trusts 70% of the tariff for emergency admissions above an agreed level;

• best practice tariffs – rewards the adoption of best practice by trusts in areas agreed by their CCGs;

• the capped expenditure programme – aims to contain spending in 14 specific areas of the country in 2017-18; and

• the cap and collar mechanisms – where commissioners pay for activity using the national payment by results tariff, but only
to a certain contract value.

Revenue funding
Capital
Other sources of financial support

Source: National Audit Office

26  Part Two  NHS financial sustainability

2.4 A number of additional financial mechanisms (Figure 8) to provide incentives for

the NHS to achieve emerging priorities have added to the complexity of the system.
Our analysis showed there is no correlation between acute trusts’ reference cost index
(a measure of their financial efficiency) and their overall financial position. Additional
financial mechanisms have also led to unintended consequences. For example, since
2010-11 a reduced tariff has been applied to emergency admissions above a baseline
level established in 2008-09. The tariff was intended to reduce the financial incentive for
acute trusts to admit emergency attendances and admissions have stabilised since it
was introduced. However, it has made it more difficult for trusts to manage the financial
risks of meeting non-elective demand, particularly where capacity is constrained. As
demand rises above planned levels, as well as only being paid at the reduced tariff,
acute trusts face incurring higher marginal costs for meeting this demand (because of
reliance on agency/locum staff) and having to cancel elective work and lose associated
income for this work. This reduced tariff will be abolished from 2019-20. Paragraph 2.13
on the Sustainability and Transformation Fund illustrates another example of a financial
mechanism that has led to unintended consequences.

2.5 In September 2016, NHS England and NHS Improvement announced their intention
for each sustainability and transformation footprint to have a shared financial control
total (financial target) that is the sum of individual trust control totals. They hoped this
would encourage local systems to share financial risk, as organisations within the same
system would be able to adjust their financial control totals to reflect relative pressures
and performance, if they met an aggregate control total. In 2017-18, a number of
prospective integrated care systems piloted system control totals. In 2018-19, integrated
care systems began operating joint system control totals that link payment of the Provider
Sustainability Fund (see paragraph 2.14) to system delivery to better incentivise joint
working and pool risk.

2.6 The current system leads to commissioners and providers spending time and
resources (transactional costs) discussing levels of activity and what type of activity was
carried out. The national bodies would like local partnerships to spend less time on
these transactional discussions and more time on developing better data on the cost
of interventions.
 NHS financial sustainability  Part Two  27

Proposed changes to the financial architecture

2.7 NHS England and NHS Improvement intend to reform the financial
architecture supporting the NHS, but full details of the reforms are not yet known.
However, NHS England and NHS Improvement have proposed several changes to
the national tariff for 2019-20, including:

• setting the next national tariff for 2019-20 for one year only − in 2017-18 and
2018-19 a two-year tariff was applied, but NHS England and NHS improvement
considers that a one-year tariff will provide more flexibility to respond to changes
resulting from the NHS long-term plan;

• introducing a ‘blended’ payment approach for emergency care, comprising a fixed

amount linked to expected levels of activity and a volume-related element that
reflects actual levels of activity;

• reducing the Provider Sustainability Fund, with the released funds going directly
into the urgent and emergency tariff price;

• updating how the funding adjustment to recognise the different costs of operating
in certain geographic areas (market forces factor) is calculated, phased in over the
next five years; and

• reducing the tariff by 0.35% to fund the overhead costs of NHS Supply Chain.

Stakeholders that we spoke to were concerned about the amount of change that
national and local NHS bodies will be required to implement over a short period of time,
especially for local health systems where partnership working is less advanced.

2.8 NHS England and NHS Improvement have also announced:

• the creation of a new Financial Recovery Fund from 2019-20 (see paragraph
2.15); and

• that control totals will be rebased for 2019-20, to take account of distributional effects
from any changes to prices. There will also be greater flexibility for local partnerships
to agree financially neutral changes to control totals within their systems.

Progress in moving towards different payment models

2.9 In December 2014, NHS England and Monitor set out a plan for developing new
payment mechanisms to support new models for providing NHS care. It described a
range of approaches, including creating ‘population-based’ payments, in which a group
of providers offer a range of care for the whole local population in different care settings.
NHS England and NHS Improvement subsequently published a range of guidance on
how CCGs and trusts might develop new approaches.
28  Part Two  NHS financial sustainability

2.10 Some place-based vanguards developing new care models have begun using new
payment models for discrete services, although overall progress has been slow. Vanguards
have reported that a lack of alignment of financial incentives across different stakeholders
remained a key risk in sustaining their models of care.11 Some local NHS bodies have
experienced complex technical and legal challenges in setting up the structures to support
new payment models. NHS England has supported local bodies in addressing these
challenges. Following a three-month public consultation in autumn 2018, NHS England plan
to introduce a new integrated care provider contract for use from 2019. The NHS long‑term
plan also announced that reforms to the payment system plan move funding away from
activity-based payments to ensure that a majority of funding is population-based.

The Sustainability and Transformation Fund

2.11 In April 2016, the national bodies introduced the Sustainability and Transformation
Fund (the Fund), to support the financial recovery of trusts and give the NHS stability to
improve performance and transform services. The Department of Health & Social Care
(the Department) initially intended that the Fund would return trusts to aggregate financial
balance and give the NHS the stability to improve performance and transform services.
NHS England and NHS Improvement later clarified that the Fund should support the
trust sector to achieve its target deficit position (£580 million in 2016-17 and £496 million
in 2017-18). They originally committed funding of £1.8 billion each year until 2018-19.
Access to the Fund is based on trusts agreeing and meeting target financial positions
and performance levels. In 2017-18, 71% of trusts (149) accepted and met their control
total targets in all quarters of 2017-18, compared with 79% of trusts (177) in 2016-17.

2.12 In 2017-18, 16% of trusts (36) did not accept or meet their control totals, compared
with 25% of trusts (58) in 2016-17. In total, 210 trusts received a total of £1,793 million of
funding. Of the Fund payments in 2017-18, 46% (£826 million) helped trusts to reduce or
eliminate their deficits and 54% (£966 million) helped to create or increase trusts’ surpluses
(Figure 9). In 2016-17, 60% of the payments reduced or eliminated trust deficits.

2.13 Trusts told us that the Fund had encouraged them to prioritise short-term gains
over longer-term financial sustainability, so that they met their control totals in that
year. For example, it had led to a reliance on one-off savings such as from the sale of
land and buildings. Trusts also told us that it had encouraged them to prioritise their
own financial gains at the expense of collaborating with other local bodies to achieve
system‑wide financial sustainability.

11 Comptroller and Auditor General, Developing new care models through NHS vanguards, Session 2017−2019, HC 1129,
National Audit Office, June 2018.
 NHS financial sustainability  Part Two  29

<No data from link>

Figure 9
Sustainability and Transformation Fund payments, 2017-18
In 2017-18, 46% of payments helped trusts to reduce or eliminate their in-year deficits, with the remaining 54% creating
or increasing trust surpluses

General distribution: 209 trusts received Compared with financial positions

Payments available to trusts £417 million after core, incentives and general
that agreed to their control distribution payments were made:
total (financial performance
target) using a sliding scale • £224 million (54%) reduced
or eliminated trust deficits.
based on distance from
control totals and weighted • £194 million (46%) created
by initial allocations. or increased trust surpluses.
Sustainability and
Transformation Fund
Core: Quarterly payments to 195 trusts received Compared with financial positions
trusts providing emergency £824 million before any payments were made:
210 trusts received care for delivering agreed
financial positions and • £482 million (58%) reduced
£1,793 million or eliminated trust deficits.
performance levels.
• £343 million (42%) created
or increased trust surpluses.
Compared with
financial positions
before any payments Financial and performance 146 trusts received Compared with financial positions
were made: incentives: Payments £352 million after core payments were made:
available to trusts delivering
£826 million (46%) their agreed financial position: • £62 million (18%) reduced
reduced or eliminated or eliminated trust deficits.
for every £1 above the control
trust deficits; and totals, trusts receive another • £290 million (82%) created
£966 million (54%) £1 of funding. or increased trust surpluses.
created or increased
trust surpluses.
Bonus: Any funding not 149 trusts received Compared with financial positions
allocated within the core, £199 million after core and incentives
incentives and general payments were made:
distribution elements, paid
to further reward trusts that • £59 million (29%) reduced
or eliminated trust deficits.
meet their control totals.
• £140 million (71%) created
or increased trust surpluses.

Notes
1 Figures may not sum due to rounding.
2 Some 22 of 232 trusts received no funding.

Source: National Audit Office analysis of NHS England and NHS Improvement data
30  Part Two  NHS financial sustainability

2.14 In February 2018, NHS England and NHS Improvement committed an additional
£650 million to the Fund to create a larger £2.45 billion Provider Sustainability Fund for
2018‑19. It has also introduced a £400 million Commissioner Sustainability Fund, to
support CCGs to return to in-year financial balance. National bodies plan to phase out
both sustainability funds, rolling this funding into baseline resources. They intend to start
this process in 2019‑20 (paragraph 2.7) but have stated that they do not plan to move
completely away from current mechanisms until they are confident that local systems will
deliver financial balance.

2.15 In January 2019, NHS England and NHS Improvement also announced the creation
of a new Financial Recovery Fund from 2019-20. The fund will only be accessible for
trusts where deficit control totals indicate a risk to financial sustainability and continuity
of services, and where agreed financial recovery plans are in place to deliver significant
year-on-year improvement in sustainability and financial performance. The fund will
mean the end of the control total regime and Provider Sustainability Fund for all trusts
which deliver against their recovery plans by 2021 at the latest.

Other sources of financial support

2.16 The Department and NHS England may provide financial support to trusts in
difficulty. This may take the form of interest-bearing loans, or non-repayable public
dividend capital.

2.17 NHS Improvement hoped that the Sustainability and Transformation Fund would
replace the need for most direct cash funding from the Department to trusts. However,
extra financial support from the Department and NHS England for trusts in financial
difficulty continued to increase to £3.4 billion issued in 2017-18, up from £3.1 billion in
2016-17 and £2.4 billion in 2015‑16. To deter trusts from overspending and incurring
deficits, the Department has increasingly been offering this support in the form of
loans rather than public dividend capital. In 2017-18, 94% of the Department’s support
(£3.2 billion) was given in this way, up from £2.8 billion in 2016-17.12 Most of it was given
as revenue support (£2.8 billion) to allow trusts to maintain services, rather than as
longer-term capital support (£0.5 million).

2.18 By March 2018, outstanding debt issued by the Department to trusts in

financial difficulty reached some £8.0 billion, up from £1.8 billion on 31 March 2013.13
The Department expects the debt to be repaid by trusts in due course. However, the
profile of loan and interest repayments appears unrealistic (Figure 10), with some
£4.5 billion of loan repayments due in 2020 alone. It is likely, in the short term, that the
Department will issue new loans to trusts to meet these repayments, or for the term
of the loans to be extended.

12 These figures exclude loans issued by the Department to trusts in the normal course of business, which totalled
£0.25 billion in 2017-18. These provide capital investment or support short-term working capital requirements where
there is evidence that the trust is viable in the longer term and can repay the loan.
13 The £1.8 billion includes normal course of business loans, as data are not available to distinguish the type of loan for
previous years.
 NHS financial sustainability  Part Two  31

line_chart_table_175mm

Figure 10
Loan repayments due to be repaid by trusts to the Department
The profile of loan repayments appears unrealistic

Loan and interest repayment (£bn)

5,000

4,500

4,000

3,500

3,000

2,500

2,000

1,500

1,000

500

0
2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 2042

Note
1 Loan repayments comprise principal and interest payments.

Source: National Audit Office analysis of Department of Health & Social Care data

2.19 Of the £8.5 billion of loans and interest that are due to be repaid to the Department,
£0.5 billion relates to interest payments over the term of the loans. One trust is expected
to repay £503 million, of which £48 million relates to interest payments. In 2017-18, trusts
paid the Department £124 million in interest. Trusts with the biggest deficits hold the
most debt. In addition, the Department has historically imposed higher interest rates on
loans to trusts in financial special measures (6% compared with 1.5% for most other
trusts). Since October 2018, the Department has reduced the interest rate on all new
loans issued to these trusts who deliver three months of benchmarked performance.
As of November 2018, only one trust did not meet these criteria. However, it continues
to apply a higher interest rate of 3.5% to those trusts that have not accepted their control
totals or that are in special measures. The higher interest rate is intended to discourage
trusts from getting additional financial support but may add to their financial challenge by
pushing them further into deficit.
32  Part Two  NHS financial sustainability

Capital funding
2.20 Capital funding covers spending on buying or improving an asset, such as keeping
facilities up-to-date and rolling out new technologies. Investment in capital is essential for
maintaining quality of care, improving productivity and achieving the transformation that
is required for the NHS to be sustainable in the longer term.

2.21 Local NHS bodies that we spoke to told us that there was a shortage of
capital funding. In 2017-18, trusts estimated that they had accumulated £6.0 billion
in maintenance costs that need to be addressed, up from £4.0 billion in 2012-13.14
These costs would be addressed by a combination of both capital and revenue funds.
Within this, required maintenance classified as a high and significant risk increased
from £1.4 billion in 2012-13 to £3.1 billion in 2017-18.

2.22 Since 2014-15, the Department has used money originally intended for capital
projects to cover a shortfall in the revenue budget. The government’s 2015 Spending
Review, set out an indicative profile of capital to revenue switches that would finish
before the end of the Spending Review period. In line with this, in 2017-18, the
Department decided at the start of the year to transfer £1 billion of its £5.6 billion
capital budget to revenue budgets to fund day-to-day services. This followed transfers
of £1.2 billion in 2016-17 and £950 million in 2015-16. The Department plans to transfer
£0.5 billion in 2018-19, £0.25 billion in 2019-20, and intends to stop this practice from
2020-21. The reduction in these transfers has been accompanied by a rise in the
annual capital budget available since 2016-17; £1.3 billion more in 2018-19 than 2016-17.
The revenue support reduced the deficit (or increased the surplus) reported by those
trusts. But there is a risk that trusts have sacrificed long-term investment to meet the
immediate needs of service provision. For example, some trusts may have delayed
projects to fund day-to-day running costs. The Department is also undertaking a review
of NHS capital, which will feed into the capital settlement in the 2019 Spending Review.

2.23 Local NHS bodies told us that the capital funding system makes it difficult for them
to plan and is acting as a barrier to investment. They told us that:

• long-term decisions about capital investment cannot be made because of the

relatively short-term nature of allocations;

• it can take time for the national bodies to make decisions about capital allocations,
making planning and managing capital programmes very difficult;

• local partnerships have received extra capital funding for specific projects, but they
are unable to pool funding and the projects do not always address the priorities of
the partnerships;

• filling in documents to access financial support can be resource-intensive and can

require the same amount of effort irrespective of the level of funding; and

• trusts and CCGs reporting deficits do not generate surplus cash, which may mean
they have no funds to invest in capital.

14 These are self-reported figures, taken from the Annual Estates Return Information Collection.
 NHS financial sustainability  Part Two  33

The long-term funding settlement for NHS England, 2019-20

to 2023-24
2.24 As part of the £20.5 billion settlement, the government asked NHS England
to produce a 10-year plan with the following priorities: making progress towards
achieving agreed waiting times; transforming cancer care; better access to mental
health services; better integration of health and social care; and focusing on preventing
ill‑health. This plan was published in January 2019.

2.25 The government also set the NHS five financial tests to show how the NHS will do
its part to put the service onto a more sustainable footing; (including providers) return to
financial balance; achieve cash-releasing productivity growth of at least 1.1% a year, with
all savings reinvested in front-line care; reduce the growth in demand for care through
better integration and prevention; reduce variation across the health system, improving
providers’ financial and operational performance; and make better use of capital
investment and its existing assets to drive transformation.

2.26 The NHS long-term plan sets out how the NHS aims to meet the expectations
and tests set out in the settlement, which are described as stretching but feasible.
In its 2018 Autumn Budget, the government announced that at least £10 billion (16%)
of the settlement would be allocated to mental health services. The long-term plan
announced that by 2023-24, £4.5 billion a year of the settlement would be allocated
to primary medical and community services. Bringing stability to the system would
require £1.85 billion to eliminate the underlying deficit (paragraph 1.13), although
NHS Improvement’s additional efficiency requirement for trusts with a deficit control
total, set out in the long-term plan, of at least 0.5% above the 1.1% trust sector minimum
requirement should help to reduce this underlying deficit. Reducing the waiting list to
the level last seen in March 2018 would require an estimated £700 million (paragraph
1.15). In addition, the NHS will need to absorb ongoing cost pressures, such as
increases in demand for services from a growing and ageing population. We have
previously reported that funding boosts appear to have been spent on coping with
current pressures rather than making the changes required to put the health system
on a sustainable footing.15

15 Comptroller and Auditor General, Sustainability and transformation in the NHS, Session 2017–2019, HC 719,
National Audit Office, January 2018.
34  Part Two  NHS financial sustainability

2.27 The 3.4% average uplift in funding applies to the budget for NHS England and not
to the Department’s entire budget. The Department’s budget covers other important
areas of health spending such as most capital investment for buildings and equipment,
prevention initiatives run by Public Health England and local authorities, and funding
for doctors’ and nurses’ training. Spending in these areas could affect the NHS’s
ability to deliver the priorities of the long-term plan, especially if funding for these areas
reduces. The government will consider proposals in these areas as part of its Spending
Review 2019. Unless further changes are made, the Department’s budget, excluding
the budgets for NHS England and capital, will fall by £1 billion in real terms in 2019-20.
The 2019 Spending Review will cover the period from 2020-21 onwards.

2.28 Local NHS bodies are also concerned that, without a long-term funding
settlement for social care, it will be very difficult to return the health sector to financial
balance, given the links between health and social care. Our report on the adult social
care workforce found that the Department could not demonstrate that the sector
is sustainable.16 The government’s 2018 Autumn Budget announced an additional
£650 million for social care but provided no details about how the sector will be made
sustainable in the longer term.

2.29 There is a risk that the NHS will be unable to use some of the £20.5 billion
of funding optimally due to difficulties recruiting staff (paragraph 1.19). We and the
Committee of Public Accounts have previously reported that trusts had used temporary
staff to fill short-term workforce pressures, which was a costly and inefficient use of
resource.17 There is also a risk that the extra money will not be spent if healthcare
providers do not have the staff to meet the demand for services.

16 Comptroller and Auditor General, The adult social care workforce in England, Session 2017−2019, HC 714, National
Audit Office, February 2018.
17 Comptroller and Auditor General, Managing the supply of NHS clinical staff in England, Session 2015-16, HC 736,
National Audit Office, February 2016 and HC Committee of Public Accounts, Managing the supply of NHS clinical staff
in England, Fortieth Report of Session 2015-16, HC 731, April 2016.
 NHS financial sustainability  Part Three  35

Part Three

Supporting local partnerships

3.1 In this part of the report, we look at how local partnerships between health and
care organisations are progressing, and what the national bodies – the Department of
Health & Social Care (the Department), NHS England and NHS Improvement – are doing
to support them.

Local partnerships
3.2 Sustainability and transformation partnerships bring together clinical commissioning
groups (CCGs), NHS trusts and NHS foundation trusts (trusts) and local authorities, along
with primary care and voluntary sector representatives, to think collectively through their
local challenges and potential solutions (Figure 11 overleaf). The 44 partnerships started
from very different positions. For some, strong partnership working already existed, but in
other areas, organisations had never come together to work collaboratively this way before.

3.3 Some partnerships have evolved, or are in the process of evolving, into integrated
care systems (ICSs), formerly known as accountable care systems. The systems aim to
have greater control over spending of funds with less involvement of national regulators.
Partnerships and integrated care systems are viewed as the vehicles of change for a
more integrated health and care system with emphasis on populations, places and
systems. The NHS long-term plan notes the aim to have integrated care systems
covering the whole country by April 2021. As neither sustainability and transformation
partnerships nor integrated care systems are statutory bodies, the success of the system
is determined by the willingness of the bodies within the system to come together.

Progress to date
3.4 Last year’s report found that partnerships were laying the foundations for more
strategic system-wide planning and delivery. In August and September 2018, we visited
six areas to gain insight into the progress being made and the key challenges facing
partnerships and ICSs.

3.5 All stakeholders reported that progress had been made by their system across
some, or all, of the key components for success (Figure 12 on page 37), depending on
the stage the partnerships had reached in their development. However, it is difficult to
assess progress across England because NHS England and NHS Improvement are yet
to update their baseline assessment of sustainability and transformation partnerships’
progress that they published in July 2017. National bodies plan to develop a new
accountability and performance framework for integrated care systems.
Figure x shows...

Figure 11
Timeline of key developments in local partnerships
36  Part Three  NHS financial sustainability

December 2015 March 2016 March 2017 July 2017 October 2018
NHS England and NHS 44 geographical NHS England set out new NHS England and NHS NHS England and NHS
Improvement asked NHS footprints were requirements which included Improvement published Improvement wrote to STPs and
leaders to come together to announced and signed encouraging local systems to a baseline assessment integrated care systems (ICSs)
produce five-year plans by off by NHS England and formalise their governance and stated of STPs’ progress. telling them to create five-year
the end of June 2016. NHS Improvement. that all NHS organisations will form plans by autumn 2019, to set out
part of a sustainability transformation how they will improve services and
partnership (STP). achieve financial sustainability.

2015 2016 2017 2018 2019

October 2016 December 2016 June 2017 April 2018 May 2018 April 2019

Plans were submitted Clinical commissioning 10 STPs evolve into ICSs. The number of STPs NHS England and Selected ICS areas will
by footprints following groups (CCGs) and They were selected as the reduced to 42 following NHS Improvement pilot a National Oversight
discussions with trusts submitted their most advanced systems in the merger of three announced four Framework for Integrated
national NHS bodies. operational plans for terms of quality of plans and STPs in Cumbria and more areas to Care Systems, developed
2017-18 and 2018-19. ability to collaborate. They the North East. become ICSs. by the national bodies, that
All footprints’ plans had began working in ‘shadow’ will describe how regulatory
been published online. form before adopting arrangements will work in
system control totals for the most mature systems.
2018-19.

Source: National Audit Office

 NHS financial sustainability  Part Three  37

<No data from link>

Figure 12
Key components of success in sustainability and transformation partnerships and
integrated care systems

Good, long-standing Agreeing a system-level vision, Appropriate investment in time

relationships strategy and plan and resources
Investment in Commitment to prioritising the system, Both from leaders across individual
relationship-building. based on openness and transparency organisations and a team working
of finances across the system. for the system.

New governance and Effective clinical and Integration at a

commissioning structures public engagement place-based level
For example, single forum Embrace clinical Bringing together community
for all providers or all and public challenge care, community mental health
commissioners, integrated and scrutiny. services, primary care, social
commissioning across the care and hospital outreach
area, single health and care services, supported by a
leadership team. single care record.

Source: National Audit Office

3.6 Most areas noted that the pace of change was slow in transforming the way
services are provided, with few yet to reach the stage where major service reconfiguration
had taken place. For example, even when partnerships have agreed on proposals for
major service reconfiguration it takes time to consult the public on the proposed changes,
deal with any legal challenges and receive approval from all relevant bodies, including in
some cases requiring capital, HM Treasury.

Challenges
3.7 In 2017-18, most partnerships had deficits, when trusts’ and CCGs’ finances
were added together (Figure 13 overleaf). Even the more advanced partnerships that
we visited reported significant challenges in managing demand within their budget.
Figure 14 on page 39 highlights some of the key challenges faced by partnerships
and ICSs, many of which were highlighted in our previous report.
38  Part Three  NHS financial sustainability

Figure x shows...

Figure 13
Surplus/deficit of sustainability and transformation partnerships, 2017-18
Out of the 44 partnerships, 73% (32) had a deficit in 2017-18, when trusts’ and CCGs’ finances were added together

Surplus/deficit of Sustainability and Transformation

Partnerships (trusts and clinical commissioning groups)
Deficit greater than £150 million
Deficit of £101 million to £150 million
Deficit of £51 million to £100 million
Deficit of £1 million to £50 million
No surplus or deficit
13
Surplus of £1 million to £50 million
Surplus of £51 million to £100 million

Areas working towards developing an

integrated care system (ICS)
6 11
1 South Yorkshire and Bassetlaw
2 Frimley Heath
8
3 Dorset 1

4 Milton Keynes, Bedfordshire and Luton

5 Nottinghamshire 5
6 Lancashire and Cumbria
7 Buckinghamshire, Oxfordshire and
Berkshire West (two ICSs)
8 Greater Manchester (devolution deal)
9 Surrey Heartlands (devolution deal) 12
4
10 Gloucestershire
11 West Yorkshire 10
12 Suffolk and North East Essex 7

13 West, North and East Cumbria 2

9

Source: National Audit Office analysis of NHS England and NHS Improvement data
 NHS financial sustainability  Part Three  39

<No data from link>

Figure 14
Summary of the key challenges raised by sustainability and transformation partnerships
and integrated care systems
Key challenges include resources, system incentives and regulatory processes

Resources Partnership working Regulation

Funding: a shortage of additional NHS and local government: while Statutory responsibilities: concern
central funding for transformation could some progress has been made, there that any worsening of financial
limit what partnerships can achieve. remains a huge challenge in reconciling positions will result in regulation
The tight financial position of most the culture and processes of local defaulting to individual organisations
partners makes it difficult to release government and NHS partners. and their legal duties, rather than any
any funds locally. Local bodies told us wider system-working.
that the long-term plan for capital is
unclear, making it hard for local areas Geography: in some areas,
to make long-term plans. partnership boundaries are not a
natural fit. Rural areas struggle to
deliver services efficiently at scale
Significantly challenged as the population is dispersed over
organisations: while recognising larger areas. London has its unique
it is a positive step for systems to challenges given the flow of patients
be tackling the issues underlying moving between partnerships
these organisations, they can use within London.
up substantial time and resources
firefighting, leaving little time and
resources for long-term transformation. System incentives: partnerships told
us that the different ways in which
partners are funded and paid are not
Workforce challenges: local areas complementary and do not encourage
continue to face shortages of key system-wide efforts to reduce demand.
staff groups, including GPs and care
workers, that are pivotal to new ways
of providing services. This is even more Information governance: actual or
of a challenge in rural areas and areas perceived barriers to data-sharing can
with poor performing providers. hinder system-level working.

Statutory responsibilities: the need

for individual organisations to meet
their own statutory responsibilities
hinders partnership working.
Partnerships are not statutory bodies
supported by a legislative framework,
and so they require the goodwill of
all involved.

Source: National Audit Office

40  Part Three  NHS financial sustainability

3.8 In response to a formal request from the Health and Social Care Select Committee
and the Prime Minister, the national bodies in discussion with NHS colleagues have
developed a provisional list of potential legislative changes for Parliament’s consideration
to support better integration in the best interest of patients. These proposals include:
giving trusts and CCGs shared new duties; removing barriers to ‘place-based’
commissioning and counterproductive competition rules; and supporting the more
effective running of integrated care systems and the creation of integrated care trusts.

Supporting local NHS bodies

Helping local bodies to understand demand pressures

3.9 To be sustainable in the long run, the NHS needs to be able to meet the increasing
demand for healthcare services within its limited resources. For example, between
2011-12 and 2016-17, the total number of people admitted to hospital grew by an annual
average of 3.4%. Local bodies need a good understanding of the reasons for increasing
activity to manage this demand. Regional offices of the national bodies also need a good
understanding to support local bodies to manage demand and gain assurance that
they are managing demand effectively. However, it is difficult to predict and quantify all
variation in demand because of the complex nature of healthcare and drivers of demand.

3.10 Our analysis shows that less than half of the increase in hospital activity between
2011-12 and 2016-17 can be explained by an ageing and growing population (Figure 15).
Several other factors, such as unmet health needs, and medical advancements, are
responsible for the remaining increase. Our previous reports have also highlighted that
there is limited understanding of the drivers of demand for some services, such as
ambulance services.18

3.11 Activity growth rates vary considerably across regions, after accounting for changes
in population size and age (Figure 16 on page 42). For example, between 2011-12 and
2016-17 the change in outpatient attendances was 5% in South East England but only
1% in the South West. Some initiatives led by national bodies, such as RightCare, have
helped to improve local understanding of the factors that drive local variations in changes
in demand.

18 Comptroller and Auditor General, NHS ambulance services, Session 2016-17, HC 972, National Audit Office, January 2017.
 NHS financial sustainability  Part Three  41

figure_two_bar_horizontal_135mm

Figure 15
Change in hospital activities, 2011-12 to 2016-17
Less than half of the recent increase in hospital activity can be explained by a growing
and ageing population

Outpatients 6.4 18.3

Elective admissions 6.8 6.6

A&E 4.0 7.1

Emergency admissions 6.1 5.6

0 5 10 15 20 25 30

Percentage (%)

Growth explained by growing and ageing population

Growth explained by other factors

Notes
1 Accident and emergency (A&E) attendances include only type 1 and 2 A&E departments. Type 1 A&E departments
are consultant-led 24-hour services with full resuscitation facilities and designated accommodation for the reception
of A&E patients. Type 2 A&E departments are consultant-led single speciality A&E services with designated
accommodation for the reception of patients.
2 Elective admissions are arranged in advance and do not include emergency admissions, maternity admissions
or transfers from hospital beds in other providers.
3 Emergency admissions are unpredictable and short notice admissions, because of the clinical need.
4 Outpatient appointments are when a GP refers a patient to a consultant or other hospital-based specialist
for further advice.
5 Other factors include changing patient expectations, technological advancements and changes in medical practices.

Source: NHS England data

figure_two_bar_135mm

Figure 16
Changes in hospital activities by region, 2011-12 to 2016-17
There is considerable variation in changes in activity by region, after adjusting for changes in population size and age

Average annual growth rate (%)

7
42  Part Three  NHS financial sustainability

6
5.9

4.6
4

3.5
3
3.1 3.1
2.8

2 2.3 2.3
2.1 2.2 2.2 2.1
1.8
1.5 1.5
1 1.3 1.3
1.2
0.9 1.0
0.7 0.6 0.7 0.8 0.2 0.7
0.5 0.5 0.6
0.4
0
-0.2 -0.2
-0.4 -0.4
-0.6 -0.5
-1
East East Midlands London North East North West South East South West West Midlands Yorkshire and
the Humber

Emergency admissions
Elective admissions
Outpatients
Accident and emergency (A&E)

Note
1 See notes for Figure 15.

Source: National Audit Office analysis of NHS Digital’s Hospital Episodes Statistics data
 NHS financial sustainability  Part Three  43

3.12 However, local partnerships had mixed views about the extent to which they
understood what was driving demand in their areas. They noted that combining data
from across local bodies, including health and local government, would help to provide
a better understanding of demand pressures. For example, a lack of linked data across
health and social care means NHS England cannot assess the impact of out-of-
hospital care on hospital activity. Better data in this area would complement the work
that national bodies are undertaking with partnerships to develop population health
management expertise. This includes a programme that trains providers in demand
and capacity modelling techniques and provides support to commissioners to assure
demand and capacity planning, and the implementation of a national population health
management dashboard, which they aim to launch in 2019. Commissioners and
trusts are now required to set out the drivers of activity growth between years in their
operational plans.

National efficiency programmes

3.13 The national bodies have several programmes to help CCGs and trusts manage
demand, deliver savings, reduce costs and develop their population health management
(Figure 17 on pages 44 and 45). Local bodies told us that they have found these
initiatives useful, although the lack of up-to-date information can limit the effectiveness of
some programmes, such as RightCare.

Regulation
3.14 Last year’s report found that NHS England and NHS Improvement needed to
further develop the way they regulated partnerships and the local bodies within them
to become more aligned, as there were issues with duplication of information requests,
and conflicting messaging.

3.15 Since then, the two organisations have continued to make organisational changes
to help them to work more closely together. Appointments have been made to a set of
shared national director roles, including a single medical director, chief nursing officer,
chief financial officer and director for transformation and corporate development.
The regional teams of both organisations are also due to merge and will be led by
one regional director working for both organisations from April 2019. The teams will
be responsible for the quality, finance and operational performance of all local NHS
bodies in their region. NHS England and NHS Improvement plan to implement a new
shared operating model that aims to support the delivery of the NHS long-term plan.

3.16 Local areas we visited reported that the approach of national regulators has begun
to feel more joined up. Examples included regular local meetings that both regulators
attended together, and joint roles between the two regional teams, providing support
and liaising on behalf of both regulators. However, local areas also noted areas for
further improvement: when local systems are put under financial pressure, regulators
often revert to working independently, as they are separate bodies with distinct priorities;
national and regional messages provided by each regulator can be inconsistent; and
information requests from the two organisations need to be streamlined further.
44  Part Three  NHS financial sustainability

Figure XX Shows...

Figure 17
National initiatives to help bodies to reduce demand, manage costs and improve efficiency
These initiatives are helping local bodies to deliver efficiency savings

Programme Description Planned savings/reductions Achievements in 2017-18

in spending
Operational NHS Improvement’s Operational £5.8 billion by 2020-21. £1.45 billion of savings
productivity Productivity directorate supports trusts reported attributable to
£1.8 billion target for 2017-18.
in identifying recurrent and sustainable GIRFT and Model Hospital.
savings. It includes:

• the Getting It Right First Time (GIRFT)

programme, which involves national
reviews led by clinicians of medical
and surgical specialities; and

• the Model Hospital, a data portal that

shares examples of best practice,
allowing trusts to identify savings
opportunities and track progress.

Agency costs In October 2015, the Department of Health A national target to reduce Local bodies credited these
& Social Care (the Department) introduced medical agency spending, measures with helping them
specific spending controls on agency staff with an initial aim of reducing to control the costs of agency
to help trusts control staff costs. These spending by £150 million in staff. In 2017-18, trusts spent
included approved frameworks for trusts 2017-18. £2.4 billion of their total staff
to use, an annual spending limit for each costs on agency staff, down
A target for each trust for
trust, and caps on the rates that trusts from £3.0 billion in 2016-17
medical locum spending.
can pay. NHS Improvement created a and a peak of £3.7 billion in
framework to help trusts with workforce 2015-16.
planning and provides support for trusts
that are struggling to improve.

RightCare NHS England’s programme supports £1.7 billion by 2020-21. £587 million of CCG
clinical commissioning groups (CCGs) in efficiency savings
84% forecast for delivery
reducing wasteful and ineffective spending and £76 million from
between 2018-19
and improving clinical outcomes, through commissioning
and 2020-21.
information designed to show variation in specialised services.
treatment for different conditions.

Vanguards/new NHS England funded 50 pilot sites £324 million net annual Early evidence that emergency
models of care between April 2015 and March 2018 to savings by 2020-21. admissions to hospitals have
develop new models of care to integrate grown significantly more
services around the needs of the patient, slowly in vanguard areas.
with the aim of replicating them elsewhere. However, evaluating the
It invested £329 million over this period impact of the vanguards is
to help develop these new models of challenging because of data
care and spent £60 million supporting quality issues.
these vanguards.
Vanguards reported net
savings of £121 million.
 NHS financial sustainability  Part Three  45

Figure XX Shows...

Figure 17 continued
National initiatives to help bodies to reduce demand, manage costs and improve efficiency
Programme Description Planned savings/reductions Achievements in 2017-18
in spending
Urgent and NHS England’s programme is based on £790 million by 2020-21. The target of more than
emergency care the development of networks of hospitals 50% of calls to NHS 111
73% forecast for delivery in
and community services to ensure people having clinical input was
2019-20 and 2020-21.
are treated in the most appropriate setting. achieved by 31 March 2018.
It includes eight of the 50 vanguards,
2017-18 savings
which tested models of care designed
of £458 million.
to reduce pressure on Accident and
Emergency departments (A&E), such as
providing clinical advice through NHS 111
services. In March 2017, the government
announced it would provide £100 million of
capital funding to support this: £90 million
was given to 103 trusts to meet A&E
access targets, and £10 million to help the
system manage winter pressures.

Elective care NHS England’s programme is working £18 million savings from Estimate of
to redesign patient pathways for existing high-impact £12 million savings.
non-emergency care; developing tools interventions and £56 million
for health professionals to manage their savings estimate from further
patients so they see the right person in interventions by 2020-21.
the right place at the right time.

Medicines NHS England set up the programme to £1,259 million gross savings £909 million savings.
value programme improve health outcomes from medicines by 2020-21.
and ensure we are getting the best value
from the NHS medicines bill, by supporting
people to take medicines as intended and
enable access to effective treatment.

Other Other NHS England programmes include: Savings expected Primary care: 2017-18
programmes by 2020-21: outturn indicates savings
• Primary care: savings have been exceeded plans by £7 million
focused around a pay restraint for • Primary care: (1%), to give £992 million,
GPs, pharmacy reforms, freezes £2,190 million. pay capped at 1%; optical
on ophthalmic fees, constraining fees frozen.
increases to the number of • NHS continuing
consultations to the rate of population healthcare: £855 million. NHS continuing healthcare:
growth, and reducing prescription £530 million savings.
charge losses through fraud and error.

• NHS continuing healthcare

(healthcare funded by the NHS
for ongoing healthcare needs
provided outside hospital):
savings against predicted growth
in spending, to be achieved by
reducing variation between local
areas, increasing standardisation
and adopting best practice.

Notes
1 The savings target is based on Spending Review 2015 targets. The level of ambition is being reviewed as part of the NHS long-term plan.
2 These figures are self-reported by NHS England and NHS Improvement.

Source: National Audit Office analysis of documents and data provided by the Department of Health & Social Care, NHS England and NHS Improvement
46  Appendix One  NHS financial sustainability

Appendix One

Our audit approach

1 This report examines the progress the Department of Health & Social Care
(the Department), NHS England and NHS Improvement have made towards
achieving financial balance. We reviewed:

• the headline financial performance of the NHS overall in 2017-18;

• financial flows and incentives within the NHS and whether these encourage
long‑term sustainability; and

• the progress being made by local partnerships of health and care organisations,
and the support that NHS England and NHS Improvement are providing them.

2 In reviewing these issues, we applied an analytical framework with evaluative

criteria that considered what arrangements would be optimal for moving the NHS
towards financial sustainability. By ‘optimal’, we mean the most desirable possible,
while acknowledging expressed or implied constraints. A constraint in this context
is the funding settlement to the Department.

3 We do not look in detail at primary care, social care, the integration of health
and social care, public health or similar services, although the transformation and
sustainability of these services are key elements of these new partnerships’ work
and are important to the sustainability of the NHS. However, this report draws on
our previous work in these areas.

4 The NHS published its long-term plan in January 2018 shortly before we published
this report. Our report reflects the commitments described in the long-term plan but we
did not examine the costed propositions that support these commitments.

5 Our audit approach is summarised in Figure 18. Our evidence base is

described in Appendix Two.
 NHS financial sustainability  Appendix One  47

Figure x shows our audit approach

Figure 18
Our audit approach
The Department
of Health & To ensure that healthcare services in England provide high-quality care to patients in a sustainable way that
Social Care and achieves value for money.
NHS England’s
objectives

How this will

be achieved The Department of Health & Social Care (the Department) is ultimately responsible for securing value for money
for health services. It fulfils its stewardship responsibility in part by setting objectives for the NHS through an
annual mandate to NHS England. NHS England allocates money to 207 clinical commissioning groups (CCGs) 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.

Our study
The study examined whether the NHS is on track to achieve financial sustainability.

Our evaluative
criteria Did the financial performance of Are funding flows and Are the Department and its
the NHS improve in 2017-18? financial incentives supporting arm’s-length bodies supporting
partnership working and a more local bodies to be sustainable
sustainable NHS? in future years?

Our evidence
(see Appendix Two • Financial analysis of • Analysis of data on savings • Interviews with NHS England
for details) accounts data from trusts made by trusts and CCGs. and NHS Improvement.
and CCGs. Evaluation of national savings
support programmes. • Interviews with key
• Review of Sustainability stakeholders in a sample
and Transformation • Interviews with the of local sustainability and
Fund payments. Department, NHS England transformation partnerships.
and NHS Improvement.
• Analysis of data on
funding, activity and
performance against
waiting times standards.

Our conclusions
This report covers 2017-18, so we first conclude on financial sustainability for that year. We consider that the growth
in waiting lists and slippage in waiting times, and the existence of substantial deficits in some parts of the system,
offset by surpluses elsewhere do not add up to a picture that we can describe as sustainable. Recently, the long-term
plan for the NHS has been published, and government has committed to longer-term stable growth in funding for
NHS England.
In our view these developments are positive, and the planning approach we have seen so far looks prudent. We will
really be able to judge whether the funding package will be enough to achieve the NHS’ ambitions when we know the
level of settlement for other key areas of health spending that emerges from the Spending Review later in the year.
This will tell us whether there is enough to deal with the embedded problems from the last few years and move the
health system forward. Let’s hope there are not too many strings attached.
48  Appendix Two  NHS financial sustainability

Appendix Two

Our evidence base

1 We reached our independent conclusions on whether the NHS is on track to
achieve financial sustainability after analysing evidence we collected between June
and October 2017. Our audit approach is outlined in Appendix One.

2 We analysed financial and performance data. Financial data came from

NHS accounts and data provided by the Department of Health & Social Care
(the Department), NHS England and NHS Improvement. Data analysis included:

• the overall financial position of the NHS in 2017-18;

• a time series analysis of clinical commissioning groups’ (CCGs’) finances against

their planned and actual year-end positions;

• a time series analysis of the financial position of NHS trusts and NHS foundation
trusts (trusts) against surplus/deficit, income, current assets and current liabilities;

• additional financial support compared with previous years;

• a time series analysis of NHS activity; and

• a time series analysis of performance against key access standards.

3 We compared existing financial data on trusts with performance against

waiting times standards. We compared the average financial performance across
trusts in 2016-17 with waiting times standards for accident and emergency (A&E),
cancer treatment and routine, non‑urgent referrals.

4 We carried out a review of the Sustainability and Transformation Fund in

2017-18. We assessed:

• the outcomes of the Fund against NHS England and NHS Improvement’s
stated objectives;

• the distribution of general, core, incentive and bonus payments to trusts; and

• the impact on trusts’ financial positions at the end of the year.

 NHS financial sustainability  Appendix Two  49

5 We evaluated the national support programmes that NHS England and NHS
Improvement have put in place to help local bodies deliver savings. We reviewed:

• data on costs and outcomes from each programme, where available;

• planned and achieved financial savings; and

• support, guidance and best practice shared with local bodies.

6 We analysed data on quality, innovation, productivity and prevention

savings made by CCGs and cost improvement programme savings made by
trusts. This included:

• trends in achieved savings against planned savings between 2013-14 and 2017-18,
and planned savings for 2018-19;

• levels of recurrent and non-recurrent savings and, for trusts, levels of generated
income; and

• analysis of savings achieved and planned across sustainability and transformation

partnership areas.

7 We spoke to a range of staff across the Department, NHS England and

NHS Improvement. This was to understand the support that they have given to local
bodies to make savings and financial improvements, and the support they are giving
to sustainability and transformation partnerships and integrated care systems. We also
spoke to a selection of staff from NHS England and NHS Improvement’s regional offices.

8 We interviewed a range of stakeholders. This work was designed to obtain views

on: financial pressure and challenges within the NHS; oversight by national bodies;
support given to local bodies and systems; and progress in partnership working.
We consulted with the Care Quality Commission, the Healthcare Financial Management
Association, the Health Foundation, the King’s Fund, NHS Clinical Commissioners,
NHS Providers, the Nuffield Trust, the Royal College of GPs, the Royal College of
Physicians and the Royal College of Surgeons.

9 We conducted interviews at a sample of six sustainability and transformation

partnerships in August and September 2018. This work was designed to understand:

• progress in implementing plans to transform services;

• the challenges faced by local systems in building effective partnerships; and

• the support provided by national bodies to tackle these challenges.

50  Appendix Two  NHS financial sustainability

10 We selected our sample of six sustainability and transformation partnerships by

considering the following factors:

• a range of progress as assessed by NHS England’s July 2017 ratings, including

two integrated care systems;

• a broad geographic spread across England;

• a range of rural and non-rural partnerships; and

• a range of leaders, including where the partnership lead was from a trust,
CCG or local authority.

11 Overall, we met with 74 individuals representing 58 different organisations.

 NHS financial sustainability  Appendix Three  51

Appendix Three

Technical notes
1 In preparing and analysing the data used throughout the report, we have made
several assumptions and adjustments.

2 Information on NHS trusts and NHS foundation trusts (trusts) may differ from that
reported by NHS Improvement due to the way we have treated trusts that changed
their status in‑year.

Presentation of figures
3 Except where otherwise noted, figures are presented in nominal terms and have
not been adjusted for inflation.

4 Where possible, income and expenditure figures are presented on a basis that
is consistent with the underlying trusts’ published accounts.

5 Income figures for trusts include:

• income from patient care activities; and

• other operating income (including income from the Sustainability and

Transformation Fund, training activities, rental income and income from
other miscellaneous sources).
52  Appendix Three  NHS financial sustainability

6 Expenditure figures for trusts include:

• staff costs, except those capitalised as part of the costs of non-current assets;

• operating costs, including purchase of healthcare services from other

organisations, expenditure on medical supplies, including drugs and other
consumables, and transport costs;

• premises costs, including depreciation and amortisation and support services;

• net interest and other finance costs;

• public dividend capital dividends payable;

• other gains and losses, including a share of profit or loss of associates and joint
arrangements, gains and losses on disposals of assets, and other movements in
fair values of assets;

• corporation tax expenses; and

• premiums payable for clinical negligence liabilities.

7 Trusts’ income and expenditure figures have also been adjusted for the effects of
organisational changes, to report underlying performance by excluding the effects of
one-off transactions, to reflect the impact on trusts which could not have been planned
at the start of the year.

Adjusting for the effects of organisational changes during 2017-18

8 This report refers to 232 trusts in existence on 31 March 2018. This figure excludes
Mid Staffordshire NHS Foundation Trust, which ceased to provide healthcare services
on 1 November 2014 and formally dissolved on 1 November 2017. Mid Staffordshire
NHS Foundation Trust recorded a deficit of £77,000 in 2017-18. The costs relate to the
payment of historical liabilities and the overhead costs of the shell company. Our analysis
throughout the report does not include any balances relating to Mid Staffordshire
NHS Foundation Trust in 2017-18.

9 One merger between two trusts occurred in 2017-18. Central Manchester

University Hospitals NHS Foundation Trust and University Hospital of South Manchester
NHS Foundation Trust merged to become Manchester University NHS Foundation Trust.
For this merger, we have totalled the former organisations’ income, expenditure and
surplus/deficit arising between 1 April 2017 and the date of merger and added it to the
income, expenditure and surplus/deficit of the post-transaction trust. This has the effect
of treating the merger as if it had occurred on 1 April 2017.
 NHS financial sustainability  Appendix Three  53

Adjustments to trusts’ figures

10 Trusts’ figures are adjusted to report their underlying performance by excluding
the effects of one-off transactions, and to be consistent with figures used by the
Department of Health & Social Care (the Department). Figures for NHS trusts’ income,
expenditure and surplus/deficit are reported:

• before net impairments;

• before the impact of absorption, accounting for bodies that merged or were
acquired by other organisations;

• before the consolidation of trusts’ charitable fund subsidiaries; and

• after the effects of any income support provided by the Department and
NHS England.

11 The adjustments made to trusts’ performance have been aligned for 2017-18 to
ensure that the surplus or deficit of both NHS trusts and NHS foundation trusts are
measured on a consistent basis. The calculations for the 2016-17 and years prior to this
include additional adjustments for:

• additional charges associated with bringing private finance initiative assets on

to the balance sheet due to the introduction of International Financial Report
Standards accounting in 2009‑10 (IFRIC 12);

• the impact of changes in accounting for donated assets and government grant
reserves; and

• the impact of the change in discount rate.

12 If the surplus or deficit for trusts had included the adjustments outlined above,
the overall deficit for the provider sector would have been £1,088 million (compared with
£991 million). Conversely, if the calculations for 2016-17 were calculated on the aligned
basis, the deficit for that year would have been £876 million (compared with £791 million).

13 All figures are presented on a gross basis; no adjustments have been made to
remove the effects of transactions between NHS trusts and NHS foundation trusts.
54  Appendix Three  NHS financial sustainability

Reporting of clinical commissioning groups’ figures

14 NHS England monitors the performance of individual clinical commissioning groups
(CCGs) based on the underspend or overspend calculated by comparing their planned
outturn and actual outturn for the year. No adjustments are made to the outturn reported
by individual CCGs in their annual report and accounts when calculating the underspend
or overspend.

15 NHS England also monitors the combined performance of CCGs after technical
adjustments to exclude:

• non-cash transactions such as depreciation, amortisation and impairments of assets;

• capital grants expenditure incurred; and

• the movement in provisions and any payment of provisions.

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