Following the Money: The Treasury’s new financial rules for the NHS

Given the problems beneath the bonnet, the additional funding announced for the NHS cannot simply be spent on refuelling the tank for another five years.

Large chunks of the new money will have to be used to incentivise and pay for transformation of an outdated system, and we can expect to see plenty of arm wrestling to determine how that should happen.

The “five financial tests” set for the NHS by the Treasury give a broad indication of where the key battlegrounds will be, although they require some interpretation.

Grappling with productivity

The extent to which the service will be expected to fulfil the first test, “improving productivity and efficiency”, will need to be resolved relatively quickly, as the expectation will need to be baked into the tariff from 2019-20.

The Treasury and Department of Health and Social Care will push for productivity growth of more than 1.4 per cent, which was the rate achieved by the NHS between 2009 and 2015.

I’m hearing they want 1.8 per cent, but the push back from the NHS will be that productivity over the 20 year period to 2015 averaged just 0.8 per cent, and this would make a more realistic target given that many of the easier savings will have been banked already.

Control total confrontation

The second test, “eliminating provider deficits”, will involve tricky decisions about the future of the control total regime and “provider sustainability funding”.

The Treasury is unlikely to contemplate a significant loosening of the grip offered by the current system, but might be persuaded to hand back some freedom to those trusts that have demonstrated their discipline since 2016.

If a much smaller number of trusts are classed as financially underperforming (because they will have more income and/or less stretching efficiency targets), regulatory efforts could be concentrated in a smaller number of areas, which have the deepest financial problems, perhaps with a second iteration of the health economy “success regime” programme under alternative branding.

Meanwhile, it’s likely that receiving the money currently held in the provider sustainability funding will no longer be contingent on meeting financial targets from next year, given the distortions this creates.

But there will need to be a big decision taken over whether this money instead goes into the tariff or through another form of direct payment to providers, possibly with some new conditions that incentivise transformation.

The future of commissioning for quality and innovation incentive payments, worth more than £1bn nationally, will also be hotly debated.

Most local leaders (providers and commissioners) want them scrapped or radically overhauled – which would be an easy way to shift some of the commissioning surplus into the provider deficit – but senior figures at NHS England still seem keen on them as a lever to get things done.

Model hospital wrangle

The third test, to “reduce unwarranted variation”, will put greater focus on NHS Improvement’s Model Hospital comparison tool, which looks great but is still filled with some duff data.

The data issues and limitations are neatly demonstrated by the venue for the prime minister’s big speech last week, The Royal Free Hospital London Foundation Trust, which is more efficient than average according to the reference costs indicator, yet is struggling with an underlying deficit of almost £100m.

I’m told that efforts have been made to get Treasury officials to appreciate some of these issues, and that deficits do not necessarily equate to inefficiency. If that message has been accepted I’d expect trusts to be offered far greater incentives to carry out more accurate costing (or penalties if they don’t).

The Getting it Right First Time and Right Care programmes are also likely to carry even greater urgency and weight, while the national payment tariff (so long as it’s in play) is used to incentivise transformation of outpatient services.

Capital tussle

The fourth and fifth tests, to “manage demand effectively” and “make better use of capital investment”, point to a new direction on how capital is used.

First, there will be an even stronger preference for backing projects at health economy level, rather than schemes that focus on individual organisations doing their own thing.

This will probably require local leaders to revisit the fantasy sustainability and transformation partnership plans submitted in 2016, with capital funding prioritised for the most convincing.

The new settlement, and a change in the debate about hospital demand growth, will enable the new plans to be more realistic in terms of curbing activity and banking the savings – although this would be accompanied by far greater pressure to deliver results.

On capital, it could also lead to some form of ringfencing of technology funding, given the increasing importance of these budgets and the alarming tendency for them to disappear into the ether.