Finance – System-level Funding

The NHS has written to local leaders, under the guise of Covid-19 elective activity recovery guidance, with new financial allocations that are heavily influenced by system-level performance on elective activity. The significance of this development is huge, as it represents a shift away from operating as a market, with each provider financially disconnected from the next, to a system in which the performance of each is linked to the performance of the whole, with a finite pot of money allocated across a region.

For the last six months, NHS providers have operated under block contracts as part of the emergency measures brought in during the coronavirus pandemic. This included a system of extra or top-up payments to cover covid-related costs and bring trusts into financial balance.

A number of senior local NHS leaders have already raised concerns over the expected rate of recovery in elective activity and consequently needed more realistic targets from NHSE.

One acute trust finance director, speaking to Health Swervice Journal, said; “With the numbers we’ve been given it’s going to be impossible to breakeven (due to likely financial penalties). Our understanding is there’s absolutely room for negotiation. There’s a widespread belief that nothing is set in stone as the second wave starts to bite.”

As previously set out in NHSE’s phase three guidance, systems will be expected to reach at least 90 per cent of their 2019-20 activity for overnight electives and outpatient/daycase procedures by October.

If they fall short of those expected activity levels, their baseline income will be reduced by 25 per cent of the tariff value of the shortfall. In effect, any shortfall will be paid at 75 per cent of the tariff value.

For those that exceed it, they will receive additional funding worth 75 per cent of the tariff value of the extra procedures.

Another trust finance director in the Midlands said: “Getting to 90 and 100 per cent of activity will almost certainly be too ambitious, which potentially brings in disincentives, because if you’re going to fail then you might as well fail by a lot.

“If you’re only losing 20-25 per cent of income from not doing activity then to take it to its extreme you would receive 75 per cent of planned care income from doing no activity at all. That’s purely from a business perspective of course, as opposed to a patient care perspective.”

The letter, from chief financial officer Julian Kelly and chief operating officer Amanda Pritchard, said: “Retrospective top-up funding will no longer be available from October, and unless specifically identified, all system costs will need to be met from the envelope, including additional covid-related expenditure on primary care, mental health and community services and delivery of the mental health investment standard.

“Each system and its constituent organisations should now use these envelopes to generate financial plans (aligned to operational plans and consistent with Phase 3 goals) for the second half of the year…

“Underpinning the system envelope we have provided detail at an organisational level, which systems may wish to use as a starting point for their work, but we expect all organisations to work together to ensure resources are used to deliver maximum benefit for patients and value for taxpayers across the system as a whole.”

Read the letter here

Response by Chris Hopson, CEO of NHS Providers

For those that are interested, here is NHS Providers’ full reaction to today’s financial allocations:

“Financial allocations for the second half of the year have been issued this morning. The NHS frontline has been waiting for these for some time, so it is good that they have finally arrived.

“We will want to listen carefully to trust reactions as there is a lot of complexity here. These allocations have been made at system level for the first time and they also include some detailed calculations on individual items.

“There are four specific areas of concern that we expect trusts to raise.

“First, there are some very ambitious assumptions about recovering non-NHS income that will be a significant issue for a number of trusts who are a long way off from seeing their non NHS income return to pre-COVID levels.

“Second, COVID-19 may hit differentially in a possible second wave, and if trusts experience significantly higher costs than expected, these may not be covered. We will need details on how any emergency “break glass” procedures in the event of localised second surges will work, if needed.

“Third, non covid costs for the second half of the year have been calculated by rolling over the first half costs and stripping out non recurrent items like Nightingale set up costs. Trusts will want to ensure that it is only non recurrent costs that have been stripped out and that the covid related cost element of these allocations is appropriate.

“Fourth, trusts will want more detail on exactly how the claw back of allocations will work if ambitious service recovery targets are not met and what flexibility there will be if those targets are not met, for good reason.

“Trusts are telling us this morning that it will take them time to work out the detail of what this means for them. They will need to bring together income streams from within their system allocation, from other system allocations and from direct and specialised commissioners as well as understanding adjustments which have been made for costs which will be funded nationally in the second half of the year.

“Initial, first off, reactions have generally been ones of concern that the allocations look lower than expected and insufficient to cover expected costs. We understand that the NHS did not get all it asked for from the Treasury and that this will, by definition, affect how much can be allocated to the frontline.

“NHS England and Improvement tell us that what initially might look like a large financial gap will close once trusts have accounted for all their full sources of income and the costs that will now be covered nationally. But we obviously need to be sure this occurs. If not, we risk trusts dialling back on what they are currently spending on service recovery and preparing for winter. This is the last thing we want.

“NHS England and NHS Improvement have assured us that they will carefully consider any request from a system or trust that genuinely believes it has an insurmountable problem. This will need to be followed through if required.

“So, in summary, initial reactions are – a lot of complexity, significant initial concern that the allocations look inadequate, but a hope that, when the detail is worked through, large looking financial gaps won’t end up as big as they currently seem. There is therefore a lot riding on the detailed work that will be done over the next few days”.