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The savings required across the NHS will be difficult to achieve solely by continuing with the same approach used in recent years according to the Public Accounts Committee's report published 3 February 2015.

• Report: Financial sustainability of NHS bodies
• Report: Financial sustainability of NHS bodies (PDF 198KB)
• Inquiry: Financial sustainability of NHS bodies
• Public Accounts Committee

Chair's comments

"From all our work across all of Government, the fragility of the NHS finances causes me greatest concern. The financial health of NHS bodies has worsened in the last two financial years.

The percentage of NHS trusts and foundation trusts in deficit increased from 10% in 2012–13 to 26% in 2013–14. Monitor found that 80% of foundation trusts that provide acute hospital services were reporting a deficit by the second quarter of 2014–15.

The Department has provided some £1.8 billion of additional cash support to NHS trusts and foundation trusts under financial stress between 2006–07 and 2013–14. The overall net surplus achieved by NHS bodies in 2012–13 of £2.1 billion fell to £722 million in 2013–14.

NHS England, Monitor and the NHS Trust Development Authority recognise that radical change is needed to the way services are provided and that extra resources are required if the NHS is to become financially sustainable. This includes making better use of community and primary care services to reduce pressure on hospitals.

Making this change will require significant upfront investment, but the money available for this is reducing as the number of organisations in deficit increases.

The savings required across the NHS will be difficult to achieve solely by continuing with the same approach used in recent years. The NHS has typically achieved efficiency savings of 1%–2%, against a target of 4%, partly through pay freezes.

The current system of paying for emergency admissions hinders, rather than helps, secure the financial sustainability of NHS bodies. To discourage unnecessary admissions acute trusts are only paid 30% of normal prices for all emergency admissions above 2008–09 levels - and the remaining 70% is invested in improving patient care outside hospital and reducing inappropriate hospital admissions.

However, the number of emergency admissions has increased by 48% over the last 15 years and these tariff arrangements do not cover the cost of admitting emergency patients, therefore intensifying the already difficult financial challenges the acute hospital sector faces. New incentives and strong relationships are needed to promote the more effective collaboration necessary for delivering new models of care.

Between 2012–13 and 2013–14, the amount the NHS spent on temporary medical staff increased from £2.1 billion to £2.6 billion. For example, Barking Havering and Redbridge University Hospitals NHS Trust told us that it had a 50% shortage of emergency consultants and was spending £1.5 million a month on temporary staff.

It costs the taxpayer £400,000 to train an emergency consultant, but there are claims that some consultants are choosing to leave the NHS to work on an agency basis at a substantial cost to the NHS, with typical charges of £1,760 per day. The Department should make better use of the NHS’ position as the dominant employer of temporary medical staff and require NHS bodies to use agency staff within a national framework contract.

There is scope to make savings in the amount paid under private finance initiative schemes, which cost the NHS some £1.8 billion a year. There are also opportunities to release funds tied up in surplus capital assets that could be used for upfront investment in new models of care. For example, there are some £1.5 billion worth of unused land and premises in London alone.

It is clear that the old ways will no longer work – radical change is required to make the NHS financially sustainable."

Margaret Hodge was speaking as the Committee published its 35th Report of this Session which - on the basis of evidence from Andy Hardy, Chief Executive, University Hospitals, Coventry and Warwickshire NHS Trust, Matthew Hopkins, Chief Executive, Barking, Havering and Redbridge University Hospitals NHS Trust, Dr Peter Green, Chief Clinical Officer, Medway CCG, Rob Larkman, Interim Chief Officer, Barnet CCG, Richard Douglas, Director General of Finance and NHS, Department of Health, Simon Stevens, Chief Executive, NHS England, Dr David Bennett, Chief Executive, Monitor and David Flory CBE, Chief Executive, NHS Trust Development Authority - examined the financial sustainability of NHS bodies.

The financial health of NHS bodies has worsened in the last two financial years. The overall net surplus achieved by NHS bodies in 2012–13 of £2.1 billion fell to £722 million in 2013–14. The percentage of NHS trusts and foundation trusts in deficit increased from 10% in 2012–13 to 26% in 2013–14. Monitor found that 80% of foundation trusts that provide acute hospital services were reporting a deficit by the second quarter of 2014–15.

NHS England, Monitor and the NHS Trust Development Authority recognise that radical change is needed to the way services are provided and that extra resources are required if the NHS is to become financially sustainable. The necessary changes will require further upfront investment. Present incentives to reduce A&E attendance and increase community based care services have not had the impact expected. New incentives and strong relationships are needed to promote the more effective collaboration necessary for delivering new models of care.

In 2013–14, the Department of Health (the Department) allocated £95.2 billion to NHS England to pay for NHS services. NHS England allocated £65.4 billion of this to the 211 clinical commissioning groups in England, for them to commission health care services from hospitals and other healthcare providers on behalf of their local populations. At 31 March 2014 there were 98 NHS trusts and 147 NHS foundation trusts which provided community, mental health, acute and specialist health services.

Monitor regulates NHS foundation trusts, and a new body, the NHS Trust Development Authority, supports NHS trusts that are yet to achieve foundation status. The Department has provided some £1.8 billion of additional cash support to NHS trusts and foundation trusts under financial stress between 2006–07 and 2013–14.

Conclusions and recommendations

The savings required across the NHS will be difficult to achieve solely by continuing with the same approach used in recent years. The NHS has typically achieved efficiency savings of 1%–2% against a target of 4% set by Monitor and NHS England. These savings were achieved partly through wage freezes. NHS England, Monitor, and other NHS bodies recognise that radical change is needed to the way healthcare is provided, including making better use of community and primary care services to reduce pressure on hospitals.

Making this change will require significant upfront investment, but the money available for this is reducing as the number of organisations in deficit increases. The national oversight bodies also lack the detailed and accurate cost data from local NHS bodies needed to monitor and identify cost savings achieved and whether they are sustainable in the longer term.

Recommendations: NHS England and Monitor should collect consistent and detailed cost data across the NHS to use to set efficiency savings targets for NHS bodies and to assess whether changes to service provision, including new models of care, are achieving measurable and sustainable savings in practice.

More effective collaboration between local health bodies is needed to achieve better value for money. The different payment mechanisms and financial incentives for local health bodies are not aligned to encourage the sort of integration required to implement the proposed new models of care. For example, community care services tend to use block contracts where payments are not based on the number of patients handled, whereas acute services are paid on the basis of activity using ‘payment by results’ tariffs.

This creates a financial disincentive for acute hospitals to give up activity, and for community services to take on additional activity. NHS England and Monitor are consulting on changes to the way healthcare is paid for. However, national bodies have not done enough to improve local strategic decision making, leading to a gap between what clinical commissioning groups plan to spend and the income that trusts expect to receive.

Recommendations: NHS England, Monitor and the NHS Trust Development Authority should require all local health economies to submit integrated strategic and operational plans that outline how they will implement locally the proposed new models of care. NHS England and Monitor should implement proposals for changing payment for healthcare, to incentivise the integration of services between local organisations by 2015–16.

The current system of paying for emergency admissions hinders, rather than helps, secure the financial sustainability of NHS bodies. Although emergency admissions to hospitals have increased significantly in recent years Acute trusts are only paid 30% of normal prices for all emergency admissions above 2008–09 levels. This payment method was designed to discourage unnecessary admissions on the basis that commissioners would invest the remaining 70% of tariff income in ways that would improve patient care outside hospital and reduce inappropriate hospital admissions.

However, for many acute providers these tariff arrangements do not cover the cost of admitting emergency patients, and therefore intensify the already difficult financial challenges the acute hospital sector faces. While NHS England and Monitor plan to change these arrangements they have been slow to act having identified this issue in 2013.

Recommendation: Monitor and NHS England should complete their review of the national payment system for emergency admissions promptly and implement the required changes within the next year including updating the 2008–09 baseline, taking into account the impact on patient care and the finances of organisations in deficit.

The Department is not making the most of cost saving opportunities. In 2013–14, the NHS spent £2.6 billion on temporary staff, who can be significantly more expensive than permanent employees, compared with £2.1 billion in 2012–13. There are claims that some consultants are choosing to work on an agency basis to make more money at a substantial cost to the NHS, with typical charges of £1,760 per day. Despite the NHS being the dominant employer of temporary medical staff the Department has not made best use of its position to reduce the costs involved. Some agencies do not participate in the Department’s framework contract which limits local NHS bodies’ ability to achieve value for money when hiring agency staff, particularly those needed to fill high vacancy rates in emergency departments.

There is scope to make savings in the amount paid under private finance initiative schemes, which cost the NHS some £1.8 billion a year, as there are some examples where refinancing or buying out existing schemes could provide better value for money in the long run. There are also opportunities to release funds tied up in surplus capital assets that could be used for upfront investment in new models of care. For example, there are some £1.5 billion worth of unused land and premises in London alone.

Recommendations: The Department should:

• require NHS bodies to use agency staff within a national framework contract unless they can demonstrate clear value for money benefits from local negotiation, and benchmark the cost of agency staff within and outside the national framework;
• support evaluation of alternative financing or operating options for costly private finance initiative schemes where there is a clear opportunity for improving value for money;
• accelerate the disposal of surplus capital assets to release cash for upfront investment in new models of care;
• Examine the obligations it places on consultants who are trained at taxpayers’ expense and then choose to work as temporary staff at extra cost to the NHS.

There are still 93 NHS trusts that have not yet achieved foundation trust status and a significant number are unlikely to do so. The Government’s intention is that all NHS trusts should become foundation trusts. Monitor, which licences foundation trusts, tests applicants for evidence of strong governance, long-term financial viability and ability to provide quality services.

The NHS Trust Development Authority is reviewing how long it will take for the remaining 93 NHS trusts to apply to Monitor for assessment, by assessing their clinical and financial sustainability. The NHS Trust Development Authority believed that there was a significant number of trusts that would need at least four years, and that these trusts would need to address significant financial challenges before they could produce a financially viable plan.

Recommendation: The NHS Trust Development Authority should set out how, and by when, it will put forward to Monitor each of the remaining 93 NHS trusts for assessment for foundation trust status. It should prioritise its efforts on working with the minority of NHS trusts that will not achieve foundation trust status in their own right.

Further information

• National Audit Office report: Financial sustainability of NHS bodies
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