Balancing the books while keeping services safe is hard but necessary

“It is easy to balance the books,” a Department of Health official recently explained to me.

They meant that it is easy to give people a budget, to threaten them with the sack if they overspend, and to then expect them to live within their means.

What is harder, they said – as those who followed the Stafford Hospital inquiry will attest – is to expect people to balance the books while keeping services safe.

‘Each NHS organisation has an accounting officer answerable to the Treasury’

People should be in no doubt what the priority is. Buried in one of the many publications alongside the NHS Five Year Forward View was the warning that “HM Treasury requires all NHS organisations to be in recurrent balance by the end of 2016-17, and any exceptions to this will require approval by HM Treasury”.

It is a statement clear in its intent: each NHS organisation has an accounting officer answerable to the Treasury, and the Treasury is about to make that count for something.

Nor should people be in any doubt that the outlook for the NHS budget remains grim.

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Quality trumps finances

The £8bn promised to the NHS by the Conservatives during the election is just one tiny step in Simon Stevens’s ongoing campaign to squeeze precisely that amount from the Treasury.

It looked ambitious when the NHS England chief executive bid for it, and is no less ambitious now.

I would be surprised if the Treasury opened the spending review negotiation with that offer anywhere near the table. I’d be even more surprised if by the time it ended, a chunk of the £8bn hadn’t been diverted to the better care fund.

‘I’d be surprised if a chunk of the £8bn hasn’t been diverted to the better care fund by the end’

Not that you’d know it from hearing some of the statements issued recently by those who should know better.

Although the £8bn is not yet secure, bodies representing the NHS this week demanded even more. NHS “experts” earnestly explained that quality issues now trump finances, suspending the reality that the cash must be found from somewhere. Providers have lulled themselves into believing that more money can always be found.

The truth is that the DH probably stayed within its spending limit in 2014-15 by the skin of its teeth. Without “emergency action”, which David Nicholson warned us was coming during the election, it will stand no chance of doing so in 2015-16.

That “emergency action” will, therefore, happen: the forthcoming clampdown on departmental spending in the Treasury’s toughest ever spending review could never be enforced if the NHS is given a pass to blow its budget with impunity.

Reasons for financial failure

There are five, well known reasons for the financial failure which must now be tackled.

First, the fear of special measures is injecting inflation into the system.

Second, and linked, there is a demand fuelled bubble in the agency staff labour market.

‘Individual organisations must take responsibility for sorting out their own affairs’

Third, there are a small number of organisations that stood on a financial cliff edge even before the first two factors came into play, and which are now in financial free fall.

Fourth, the lack of any penalty for insolvency in recent years has caused financial indiscipline to spread contagiously.

Finally, there continue to be structural problems of overcapacity in a handful of health economies.

The hard way of tackling these challenges rests on three principles:

• individual organisations must take responsibility for sorting out their own affairs;
• they must be supported with the tools they need to address their challenges; and
• if they still fail, that failure must not go unanswered.

A new regime

A “rapid reconfiguration regime” is needed to address overcapacity through a process which allows commissioners to initiate proposals, consult on them and then implement them inside six months.

Legislation to give effect to that early in this Parliament would help to reconfigure areas which have long been in need of it. It should also support the implementation of the NHS Five Year Forward View new care models.

Second, a new failure regime needs to be established, which unlike previous iterations must be entirely insulated from political intervention, and used only in the event of individual, institutional financial failure.

It should be the price paid by a specific organisation when it fails to manage its money, and it should be used somewhere as soon as it exists in law to squeeze the current financial indiscipline out of the system.

‘Without clear answers nailed down in law, inflationary pressures have arisen’

Third, the special measures regime needs to be codified.

What are the levels at which outcomes need to fall before a red flag is raised?

Should the Care Quality Commission be inspecting inputs (including staff numbers) or allowing providers themselves to take those decisions?

Without clear answers to these questions – nailed down in law – the inflationary pressures that have arisen from inspection teams making subjective and arguably inconsistent judgements around the country (and expecting providers to respond to them) will never be weakened.

Be brave

It would, of course, take a fair degree of courage to attempt the above. It is the hard way, and – because of that – an easier, but more dangerous path may be preferred.

The hardest nuts to crack are the issues of structural overcapacity and poorly performing hospitals.

But the easy way to address them is as they always have been: by merging stable hospitals with unstable ones, thus internalising reconfiguration issues and balancing the books at a higher level.

It is almost always a disaster, but it might clean up the balance sheets for a year or two.

Right now, the merger control regime might get in the way (as it might have done at Barts, had it been in place – and rightly so).

The second easy step is to clip foundation hospitals’ freedoms to take them outside the reach of the Competition and Markets Authority. An incidental upshot to this would be that foundation hospitals could no longer spend their surpluses.

At a stroke, a major risk to the DH’s budget would be removed alongside a major barrier to mergers.

At some point, a bombshell letter could be issued too – euphemistically entitled (something like) “Securing financial sustainability in 2015-16” to impose draconian limits on agency and management consultancy spend in all NHS organisations, and to calmly elucidate the pain that will await NHS leaders if they fail to do as they are told.

‘It is much harder to make the internal argument for radical change’

Those who pray the CQC in aid may find a newfound willingness from there to enforce “efficient” care, alongside “safe” care.

Outsiders may wonder how the government might trap itself in the response to NHS financial failure set out above: a response which triggers turbulence in the provider sector, demands cuts in staffing, and sucks responsibility for dealing with failure away from the organisations that are responsible for it.

But the reason is simpler than you might think: under pressure from within government, these are the levers that are the most superficially attractive – and politically expedient – for ministers to pull.

It is much harder to make the internal argument for radical change or controversial legislation.

So we will see, over the coming weeks and months, whether ministers will settle for the easy way to balance the books or decide to do it the hard way.

Bill Morgan is a founding partner of Incisive Health