Executive summary

Key points

  • The total budget for the Department of Health and Social Care (DHSC) rose by just 0.6% to £122.8bn in 2016/17. This followed an increase in spending of 2.8% in 2015/16. On average, since the NHS’s inception the budget has increased at 3.7% a year.
  • New funding announced in the 2017 Autumn Budget means that 2016/17 will represent one of the lowest annual growth rates in the DHSC budget between 2015/16 and 2020/21 – the period covered by the 2015 comprehensive spending review.
  • The rate of increase in 2016/17 was lower than population growth, so total health care spending in England per person fell in 2016/17.
  • Despite the low funding growth, the DHSC underspent its budget by £635m. This is a small underspend in the context of the total budget – just 0.5% – but is an improvement on 2015/16 when the departmental budget was overspent by £155m.
  • To achieve this, funding was targeted at front-line, day-to-day spending at the expense of longer-term investment. While the total budget for the DHSC rose by £772m (0.6%), NHS England’s budget rose by £2.4bn (2.3%) in 2016/17. As a result, funding for other areas fell by £1.6bn (9.0%) – this included a transfer of £1.2bn from the capital budget (defined as the capital department expenditure limit (CDEL)) to the revenue budget (defined as the revenue department expenditure limit (RDEL)).
  • 2016/17 saw the introduction of a new Sustainability and Transformation Fund (STF), provided to NHS trusts by NHS England, subject to agreeing and meeting financial and performance control totals.
  • The NHS is committed to ensuring equal access to care based on need. Historically the distribution of NHS resources across the country did not match the pattern of need. The health service has been gradually shifting money towards areas of higher need.
  • The allocation of sustainability and transformation funds in 2016/17 has increased funding in areas which are already above their assessed relative need. This meant London and the North received a greater share of the STF than their relative need, while the Midlands and East, and the South received a lower share. Ensuring that NHS hospitals are financially sustainable is important but this must be balanced against the equally important goal of ensuring that areas of high need receive their fair share of funding.
  • The NHS could not continue with a trend of rising deficits among trusts and commissioners. Actions have been taken to relieve some of the pressure, but this has come at the expense of long-term investment and fair funding.
  • Forgoing long-term investment to protect day-to-day services may be an appropriate tactic for a short period of austerity; however, the NHS is now in its seventh year of very low funding growth. Without significant investment above current plans, this is likely to continue until at least 2020/21. Continuing to forgo long-term investment will therefore make the challenge of meeting demand pressures through improvements in efficiency increasingly difficult.

Commissioners are diverging: overall financial position has improved, but more commissioners were in deficit in 2016/17

  • Commissioners, comprised of NHS England and clinical commissioning groups (CCGs), posted a surplus of £918m in 2016/17, compared with a surplus of £624m in 2015/16. The surplus for NHS England increased from £639m to £765m, while CCGs improved from a £16m deficit to a £153m surplus.
  • Commissioners were required to withhold 1% of their budget for non-recurrent spending in case the provider sector faced significant deficits in the next year. At 2016/17 year-end, this covered the negative position of the provider sector. Had the reserve been spent on non-recurrent expenditure as originally planned, CCGs would have posted a net deficit of £567m. The total reserve was £814m, with £720m from CCGs and £94m from direct commissioning by NHS England.
  • The vast majority of additional commissioner spend in 2016/17 went to NHS trusts , either via the sustainability and transformation fund (STF) (£1.8bn) or for directly commissioning services (£1.2bn).
  • An additional £200m was spent on services from non-NHS providers (including private, local authority and third-sector organisations) – a much lower increase than the £934m in 2015/16.
  • Spending on primary care prescribing costs fell by £215m, while spending on primary care, ophthalmic services, pharmaceutical services and dental services fell by £646m. Of this, the largest fall was £485m for dental services. Direct spending on GP services by commissioners was broadly flat in real terms between 2015/16 and 2016/17, but total spending on general practice rose by 3% from other investment, including IT and funding for GP forward view programmes.
  • The net financial position of CCGs improved in 2016/17, but the proportion of CCGs in deficit increased from 15% to 29%. The National Audit Office (NAO) found this was due to a divergence in the financial position of CCGs: those with overspends had large overspends and those with underspends had large underspends.
  • The pressure on commissioners has continued in 2017/18. By Q3, CCGs reported a net deficit of £471m, with an end-of-year deficit forecast of £291m.
  • CCGs are again holding a risk reserve, with the money not to be spent if the provider sector is in deficit. In 2016/17, a similar situation meant that the forecast year-end deficit in Q3 of £377m was improved to a surplus of £153m.

NHS trusts: income rose faster than costs, but this is largely due to the introduction of a new sustainability and transformation fund (STF)

  • NHS trusts posted a deficit of £806m in 2016/17, which was worse than the planned deficit of £591m. However, it was a 68% fall from the £2.5bn deficit posted in 2015/16. For 2017/18 the total deficit is forecast to rise again – to £931m.
  • There was an improvement in the proportion of NHS trusts posting a deficit, which fell from 67% in 2015/16 to 44% in 2016/17. As at Q3 2017/18, 59% of NHS trusts are in deficit.
  • 2016/17 was the first year since 2012/13 that total income for NHS trusts rose faster (3.9%) than costs (1.8%). This was in large part due to the introduction of the STF. It was also the first year since 2009/10 that the national tariff increased in cash terms.
  • The biggest increase in costs for NHS trusts was for staff, which rose by 1.3%, largely driven by a 1% increase in whole-time equivalent (WTE) staff. Permanent staff costs rose by £1.1bn (2.5%), while there was a fall in agency spending of £760m (20%), following the introduction of the agency cap. Spending on other temporary staff increased by £331m (18%).
  • Hospital drug costs rose by 4.2% in 2016/17 – lower than the 12% growth in 2015/16, but 2.1% higher than planned. Hospital drugs now account for 48% of total NHS drug costs in 2016/17, compared with 32% in 2010/11.
  • Lack of capacity among NHS trusts means that a greater amount of pre-planned care was purchased by NHS trusts from non-NHS providers, with spending rising by £111m (11%) in 2016/17.
  • Total activity in non-NHS providers increased, with a 6.8% rise in inpatient elective admissions in 2016/17, compared with 2.2% in NHS trusts. For outpatients, the number of appointments rose by 6% for non-NHS providers, compared with 5% for NHS trusts.
  • NHS trusts were again over-reliant on one-off savings to improve their financial position. 25% of in-year savings were one-off, or non-recurrent, savings, compared with the plan of 8%.
  • At Q3 2017/18, the total deficit for NHS trusts stood at £1.3bn, against a plan of £916m. By the end of 2017/18 the deficit is forecast to come down to £931m, including the STF, against a planned deficit of £496m. Without an improvement in this forecast in the last quarter, the provider-side deficit will increase again for 2017/18.

The sustainability and transformation fund: without it deficits may have grown, but funding did not match relative need

  • 2016/17 saw the introduction of the STF, provided to NHS trusts by NHS England, subject to agreeing and meeting financial and performance control totals.
  • The STF was provided on the condition that it was not spent on additional services, and therefore did not lead to any additional cost for NHS trusts
  • NHS trusts’ income (excluding the STF) grew by 1.6%. Without the STF, costs would have risen faster than income meaning the deficit could have been as high as £2.6bn – larger than the deficit in 2015/16.
  • However, the funding used for the STF would have been available as part of the overall budget, such as through increases in the tariff, which could have led to additional costs. Some of the funding could also have been provided to other areas such as primary care. Therefore, if the funding had gone through other means, the deficit would have been somewhere between £806m and £2.6bn.
  • 21 NHS trusts received no STF. This was due to them not accepting control totals, not meeting control totals, or not meeting performance targets.
  • For NHS trusts that did receive the STF, there was a wide disparity in the amount of STF, varying between 0.15% and 6.5% of operating income. There is no clear pattern between the final financial position of a provider and the allocation of the STF.
  • The STF allocation varied by provider type. Funding was targeted at trusts providing emergency care – the acute sector received 84% of the total STF despite accounting for 75% of total operating income.
  • The STF accounted for 2.2% of total income. By trust, it accounted for 2.5% of income for acute trusts, 2.3% for specialist trusts, 1.4% for mental trusts, 1.2% for community trusts, and 1.2% for ambulance trusts.
  • Around 40% of the STF went to trusts that would have had a surplus without it.

Long-term investment: trend of transferring funds from the planned capital budget to resource budget continues, to fight short-term pressure

  • NHS England’s budget increased by 2.3% in 2016/17, to provide funding for front-line services. However, with the total budget for the DHSC rising by only 0.6%, funding for other areas by the DHSC fell by 9% (£1.6bn).
  • This included a 3% fall in spending on public health, a 4% fall in capital spending, and a 47% fall in spending on non-capital informatics. Funding for Health Education England (HEE), which delivers education and training for NHS staff, remained broadly flat in real terms.
  • Capital spending fell by 4% in 2016/17, due to a transfer of £1.2bn from the planned capital budget (CDEL) to the resource budget (RDEL). This continues a trend of similar transfers every year since 2014/15, which has resulted in a fall of 19% in capital spending between 2013/14 and 2016/17 – an average of 7% a year.
  • Original plans were for capital spend to rise slightly over this period – as such actual capital spending was 22% lower in 2016/17 than originally planned.
  • An internationally recognised way of tracking capital spending is the spend per head of the workforce. This estimates the amount of additional resources that are available per worker, which may lead to a more productive workforce. With the number of WTE staff employed rising by 6% between 2013/14 and 2016/17, capital spending per WTE fell by 23% – an average of 9% a year.
  • Data from the Organisation for Economic Co-operation and Development (OECD) show that capital spending for health care, such as for hospitals and equipment, in the UK is low compared with other OECD countries, at 0.3% of GDP compared with an average of 0.5%. Increasing spending to the OECD average would mean an additional £3bn would be available for investment in health capital across the UK.
  • Falling capital spending impacts provider finances and service delivery. It limits the ability of NHS trusts to purchase new equipment, and to make repairs and maintenance to current facilities. In 2016/17, there was an estimated maintenance backlog of £5.6bn, up from £5.2bn in 2015/16. This was greater than the total capital budget.
  • Of this amount, £2.8bn represented backlog that is a high or significant risk, up from £2.4bn in 2015/16.
  • Investment in equipment has seen significant decline in spending between 2013/14 and 2016/17, falling by 54% at an average of 23% a year. Investment in new buildings fell by an average of 4.9% a year; investment in improving existing buildings fell by an average of 7.2%, and investment to reduce the backlog fell by 7.6%.
  • In 2016/17, depreciation (reductions in the value of assets such as buildings and IT equipment) was planned to be 28% higher than in 2015/16, but was 14% lower . In total, depreciation was £447m lower than plan in 2016/17.
  • The Naylor review of NHS property and estates highlighted the importance of capital investment to the productivity, transformation and long-term sustainability of the NHS. However, there is little evidence of how underinvestment in capital impacts on productivity. Future work by the Health Foundation will look to address this.

Mental health: spending has increased due to a new standard, but it’s not possible to identify where the additional funding is going

  • The mental health investment standard (MHIS) formerly parity of esteem, was introduced in 2016/17. It requires all CCGs to increase spending on mental health services in line with their total allocation, to help protect vital mental health services.
  • In 2016/17, 85% of CCGs met the MHIS. This resulted in mental health spending rising by £379m from £9.3bn in 2015/16 to £9.7bn in 2016/17.
  • This is welcome news for mental health services in need of investment. Yet it has not been possible to account for how this additional investment was spent.
  • Mental health trusts provide the majority of services in the sector, yet the income they received from NHS England and CCGs in 2016/17 rose by just £23m. This compares to an increase in CCG spending on Mental Health of £379m.
  • It is likely that some of the additional funding was allocated to the Improving Access to Psychological Therapies (IAPT) programme, which was introduced to allow adults living with common mental health conditions to talk to a mental health professional to help them manage their conditions.
  • In total, CCGs spent £430m on IAPT services in 2016/17. The cost of these varies widely across CCGs, from £0.03 to £17.56 per head – more than 500 times larger.
  • IAPT spending by CCGs is planned to increase by 8.4% to £467m in 2017/18. Total spending on mental health services by CCGs is planned to increase by 1% over the same period, so IAPT services will take an increasing share of total spending on mental health.
  • Mental health activity for services fell by 1.5% in 2016/17. When taking account of service mix, there was a 0.3% drop in cost-weighted activity for mental health services.
  • As at Q2 2017/18, 85% of CCGs were planning to meet the MHIS by the end of 2017/18, the same proportion that met it in 2016/17. The 2018/19 updated planning guidance confirmed that 100% of CCGs are expected to meet the MHIS in that year.

* All financial data in this report have been adjusted to 2017/18 prices unless otherwise specified, using HM Treasury gross domestic product (GDP) deflators – a whole economy measure of inflation as of March 2018. 2017/18 prices have been used so numbers in this report reflect numbers currently being published by NHS bodies on 2017/18 data.

We define the total budget for the DHSC as the total Department Expenditure Limit (TDEL), which is the budget allocated and spent by the department, excluding ring-fenced depreciation.

The DHSC did not exceed the money voted in parliament due to an administrative error in the treatment of National Insurance receipts.

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