Summary

The content of the NAO’s report NHS financial management and sustainability was not a surprise to HFMA members. NHS financial sustainability is a subject that has been discussed, debated and written about for many years now and is an issue constantly at the forefront of our members’ minds. Our response to the inquiry makes the following points:

•         There needs to be a clear long-term vision for the NHS that is communicated from the government to all of the NHS bodies in the Department of Health and Social Care’s group. All policies need to be consistent within this wider vision so NHS bodies have a clear understanding of what is expected from them.

•         The current financial position needs to be understood and acknowledged, with the understanding that it cannot be recovered in a single financial year.

•         Changes are required to the financial regime in order to facilitate financial sustainability.

•         A multi-year financial settlement is vital to allow NHS bodies to plan and invest in service change that will release costs eventually. The year-on-year focus on short term savings that are usually non-recurrent does not allow for sustainable changes to mechanisms for service delivery.

•         NHS organisations know how to spend funds to best meet the needs of their local populations – they need to be trusted to do so.

•         The NHS does not work in a silo – the financial pressures in other parts of the public sector also need to be dealt with.

Detailed points

Background

1. The content of the NAO’s report NHS financial management and sustainability was not a surprise to HFMA members. The NHS long term plan published in 2019 was intended to be the blueprint for the financial and operational recovery of the NHS. While its recommendations that NHS bodies should work collaboratively with their NHS and local authority counterparts were enacted in 2022, in some respects, the Covid-19 pandemic was a financial reset for the NHS[1].
2. However, getting back to business as usual has been difficult and the financial challenges evident pre-pandemic remain today. Moving out of the pandemic, many of our members hoped that the speed of decision making and the ability to work together to a common goal would continue[2] but this has not been the case. The NHS saw a large decrease in spending in 2022/23[3] partly due to the removal of additional Covid-19 funding in the previous two years. While some of the expenditure incurred in 2020/21 and 2021/22 related solely to the acute phase of the pandemic, much of it was used to fund on-going healthcare services meaning it is unsurprising the financial reset was so short lived.
3. Financial recovery and financial sustainability have been a focus of the HFMA’s work over the past five years.
4. It needs to be acknowledged that devising a financial regime that ensures that spending remains within available resources is extremely difficult, if not impossible, particularly at times like this when demand for services, and therefore resource, is outstripping supply.

Clear long-term vision

5. To achieve financial sustainability, NHS bodies need a clear vision for the future and need to understand how that vision is going to be realised. This vision must be set from the top by the government, but needs to be understood and adopted by all NHS bodies and their partners throughout the health and care system. That same vision needs to be reflected in all policies which is not always the case, as our Financial Recovery Group[4] noted:

‘Historically routes to cash have focused on headcount reduction and as pay makes up the majority of NHS expenditure, the Group’s expectation was that this is where cashable savings are most likely to be required. Group members noted that this appears to be at odds with the NHS long term workforce plan but also recognised that having the right staff, with the right skills and in the right roles is likely to contribute to cash-out savings. In part this is expected to come initially from reduction in premium rates and improved recruitment and retention of the substantive workforce.’

6. Financial sustainability is everybody’s issue, not just the director of finance and the finance department. One of the key building blocks to success is developing a clear vision for the future and placing quality improvement at the centre[5]: Again, this was discussed by the Financial Recovery Group:

‘All board members need to take joint ownership of financial recovery. Use of existing metrics and benchmarking can assist with identifying influenceable opportunities and setting realistic targets. Some of the tools highlighted included the Model Health System and Getting It Right First Time (GIRFT), as well as using internal tools such as patient level costing and service line reporting. Again, it was stressed that this cannot be purely finance driven and dictated, but services need to be given sufficient information to understand their figures and an opportunity to challenge the data and underpinning assumptions.’

7. The HFMA will be contributing to the development of the new 10-year plan. Once the clear vision has been determined and communicated to NHS bodies, there needs to be a transparent and simple financial regime so that all NHS bodies understand the resources available to them. The current arrangements are complex and are designed to encourage particular behaviours, but take time and resource to understand and manage, with NHS bodies tempted to game the system to achieve a particular financial outcome.

An honest appraisal of the financial position

8. The NHS is not a single organisation, but a group of over 300 independent organisations. The financial position of these organisations is very different and the reasons for this need to be understood. In some cases, there has been historical financial mismanagement, but this is extremely rare. In many cases, increasing demand for services, sicker patients with increasing numbers of comorbidities, increasing costs due to inflation, industrial action and the difficulty of finding suitable care for those who no longer need hospital care have all increased the costs of providing healthcare and outpaced the resources available. Factors such as the age of buildings and equipment have an impact on how well the financial pressures are weathered.
9. Those trusts in with historical deficit positions spend a lot of management time and resource applying for cash and other financial support to simply be able to pay the bills month to month. This time would be better spent understanding and resolving the root causes of the financial issues. Bold changes to the financial regime are needed to move away from managing the short-term financial position towards making changes that will have a long term financial impact. Current oversight and intervention arrangements are bureaucratic and time-consuming and should be focused on the national ‘what’ via key outcomes measures, rather than the ‘how’ delivery models.
10. The challenge facing NHS bodies is huge – some NHS bodies are aiming to make efficiencies of 7% and higher in 2024/25 to meet financial targets. This level of efficiency has not been delivered before. Furthermore, these efficiencies are usually planned for the second half of the financial year so coincide with the winter months that always experience higher demand for healthcare.
11. As the 2024/25 planning guidance was published so late, many plans were submitted with caveats about the risks around their achievability. The current system drives NHS bodies to report a planned position ‘at risk’ and deal with the consequences of failure later. An honest appraisal of the financial position and a realistic plan about what can be achieved over what period to recover that position is required. Financial penalties must only be used where there is a clear case of blatant financial mismanagement, otherwise those NHS bodies with historical deficits will never achieve balance.
12. The impact on the NHS of the additional funding announced in the October 2024 is currently being worked through. However, although welcome, it is unlikely to turnaround the financial fortunes of the NHS, due to pay rises and the employers national insurance rates increasing.
13. The first step towards this is an honest, transparent and realistic assessment of why the position is as it is to determine what can be achieved and by when. The scale of financial challenge and its impact cannot be underestimated, with underlying recurrent deficits and large efficiency requirements to meet current financial targets. There will be ongoing financial pressure for the foreseeable future.

The NHS financial regime needs to change

Short term decisions are likely to be costly in the long term

14. As the NAO identified, achieving financial balance in-year often comes at the cost of long-term financial recovery. At a recent meeting of the HFMA ICB Finance Group, members noted that it takes time to make changes to service delivery, which may mean that the return on investments made now may not be seen in the short to medium term.
15. Currently, there simply is no headroom to make those changes as decisions must be made to meet this year’s financial targets as the likelihood of failing to meet them is so high. Any investment or decision that is not going to reap immediate financial rewards is deferred in favour of the decision that will make a saving now even if it will cost more in the long-term. As a roundtable of NHS and local government finance leaders noted in 2021[6]:

‘Preventing ill health can feel a little intangible, with the benefits often realised several years later. The propensity of the NHS and, more recently, local government to set short term budgets and targets, means that it can be difficult to invest in longer term projects.’

16. Our members are concerned that to meet financial plans each year they are reliant on non-recurrent savings. This means that more savings need to be made the following year as there has been no real change to the underlying financial position. To make sustainable changes to the financial position, sustained change needs to be made at an operational level.

Population health and health inequalities

17. As the Darzi report[7] indicated, there need to be changes to the way that the NHS works to move care to the most appropriate setting and to reduce health inequalities and improve population health to flatten demand.
18. NHS finance teams are well placed to support this work but, as noted above, the return on investment will not be immediate[8]. In fact, in the short-term, it may be more costly where double running is needed while patient pathways are transformed. This needs to be acknowledged and funded in the short term with a clear plan to phase out the double running when agreed metrics are met.

The financial system is complex and takes time to manage

19. The current financial regime, both for capital and revenue, is complex. The planning process is long and takes place too late in the financial year. The planning guidance for 2024/25 was not published until March 2024 so plans were not finalised until well into the first quarter of the financial year, reducing the time available to enact those plans. NHS bodies need to know how much funding they can expect to receive before they can prepare their financial plans and all of this should happen before the start of the financial year.
20. Ideally, financial settlements would be multi-year to allow for medium to long-term planning that would include the impact of service redesign. This would include the short-term costs of service redesign, including double running costs as well as the longer-term efficiencies expected from it.
21. For capital plans muti-year settlements and medium to long-term planning is even more important. The annual capital departmental spending limit for capital (CDEL) means that expenditure must be incurred in the financial year. Current lead times with suppliers for capital schemes mean that any funding announced or released in the fourth quarter of the financial year will likely be used sub-optimally. This is a recurrent discussion item at the HFMA Provider Technical Issues Group who are concerned that the best value for money is not being achieved when capital plans are not approved or funded early enough in the financial year. Plans for larger capital schemes need to be developed in conjunction with suppliers to ensure that projects can be completed on time.

Digital solutions

22. Digital is often seen as the solution to the financial problems of the NHS. A joined up, digital NHS would benefit patients and staff and may make the patient journey smoother. Digital solutions will provide opportunities to move towards financial sustainability[9]. However, digital solutions are not going to address the problem of an aging population and increased acuity of patients.
23. Like all other investments, there needs to be a long-term view of the benefits of digital innovations. Capital as the default funding for digital needs to be reconsidered as digital solutions move to cloud based, software as a service solutions which tend to be revenue in nature[10]. Like capital, digital funding settlements need to be multi-year and include resource for proper staff, and patient, engagement and training as part of the implementation.

Trust NHS organisations to do what is best for their local populations

24. NHS organisations need to be trusted to know what is best for their local populations and to invest funds accordingly. This is often hampered by the ring-fencing of budgets that are intended to meet national priorities, but may not be local ones. 
25. The Health and Care Act 2022 introduced integrated care boards (ICBs) and integrated care systems (ICSs) with four clear objectives: improving outcomes in population health and health care; tackling inequalities in outcomes, experience and access; enhancing productivity and value for money; and helping the NHS to support broader social and economic development. Current financial and operational constraints, along with a significant level of national oversight and intervention, are hampering the ability to deliver this.
26. HFMA members are concerned that managing the number of external consultants who are currently investigating their financial performance is actually stifling innovation and getting in the way of addressing underlying issues. Members report that it is not unusual to have four outside organisations looking at parts of the financial system at any one time all making demands on management time and asking for detailed information.

The NHS does not work in a silo

27. NHS bodies work closely with their local authority partners and changes to the financial system for the NHS need to be mirrored by changes to the social care system[11]. The pressure on local authorities is felt by NHS bodies with increased demand on services, particularly emergency services, as well as increased numbers of patients with no criteria to reside in hospital but who remain there waiting for a social care package to be put in place.

About the HFMA

The Healthcare Financial Management Association (HFMA) is the professional body for finance staff in healthcare. For over 70 years, it has provided independent and objective advice to its members and the wider healthcare community. It is a charitable organisation that promotes best practice and innovation in financial management and governance across the UK health economy through its local and national networks.

The association also analyses and responds to national policy and aims to exert influence in shaping the wider healthcare agenda. It has particular interest in promoting the highest professional standards in financial management and governance and is keen to work with other organisations to promote approaches that really are ‘fit for purpose’ and effective.

The HFMA offers a range of qualifications in healthcare business and finance at undergraduate and postgraduate level and can provide a route to an MBA in healthcare finance. The qualifications are delivered through HFMA’s Academy which was launched in 2017 and has already established strong learner and alumni networks.

© Healthcare Financial Management Association 2024. All rights reserved.

While every care had been taken in the preparation of this briefing, the HFMA cannot in any circumstances accept responsibility for errors or omissions and is not responsible for any loss occasioned to any person or organisation acting or refraining from action as a result of any material in it.

November 2024