Feature / A strong start

Financial management in the new commissioning sector has been robust, but NHS England chief financial officer Paul Baumann tells Seamus Ward major challenges ahead will require the NHS finance function to work together

More than a year on from a huge upheaval, NHS commissioners in England can be proud of their achievements. The reforms are starting to bed in, clinical targets are being achieved and a net surplus recorded. NHS England chief financial officer Paul Baumann says there are many reasons to celebrate – including the efforts of finance staff – but this is no time for complacency: 2013/14 provided enough warnings to show that there are many challenges ahead.

Reflecting on the first year of operation of the new commissioning structure, he says: ‘If you consider all the anxieties, uncertainties and predictions that there have been about 2013/14 – that the NHS would fall apart or there would be financial meltdown because the new systems wouldn't work – none of that has happened. There are two reasons for this:; the threat was probably overstated in the first place, but there have also been heroic efforts by people throughout the system. The finance community has done miraculous things during the first year of operation – engaging with colleagues, making sure the system operates properly, keeping on top of financial performance and ending the year in some sort of financial order. It’s been incredibly tough for all of us, and above all I want to say a big “thank you” to every single member of the finance teams in CCGs and in NHS England who have made those remarkable achievements possible.’

The commissioning sector ended the year having spent all but 0.3% (£256m) of its planned expenditure. The significance of this should not be underestimated, he says. ‘It’s like landing a plane – or rather 212 planes – on a very small postage stamp. This has always been a real challenge for the NHS, but especially so in the first year of a wholly new commissioning sector grappling with another year of flat real funding and rising expectations.’

He says the integrated single financial environment (ISFE) system has been a major asset. The ISFE links clinical commissioning group and NHS England financial systems, allowing the fast exchange of financial information. ‘Information is flowing through the whole system – we’ve never before had a system where financial results are flowing seamlessly from the ledgers straight through to the decision-making table. Visibility of the risks, and the ability to manage them, are also much better than before.’

While further development is needed to meet all the sector’s reporting needs, the ISFE has already brought greater consistency and transparency to accounting and financial management processes.

Turning back to the numbers, he adds a note of caution. Overall, commissioners lived within their resources, but in a year when

they had access to a larger than normal drawdown of historic surpluses (£650m). In addition, the sector had just over £140m in one-off transitional funding, and vacancies in the early part of the year contributed to significant running cost underspends in CCGs and NHS England.

‘All of this gave us a much more benign financial environment than we will face in 2014/15, where the drawdown will be limited to £400m, no more transitional funding is available to cover significant pressures like the restructuring of primary care support services, and such a large underspend on running costs is unlikely to be repeated.’ Mr Baumann explains.  ‘We also need to remember the significant strain on the wider NHS position, which was already manifesting itself in 2013/14 in the form of increasing deficits in a substantial number of providers.’

CCGs have done ‘brilliantly well’ as a community – spending under plan by 0.1% (£97m) despite activity pressures and well-known issues with the disaggregation of PCT budgets, he says. However, Mr Baumann has some concerns about the variation in financial strength between CCGs. Year-end cumulative surpluses range from more than 8% of allocation to deficits of over 5%. 

There are many individual reasons for these variations, but there is little evidence that they directly reflect differences in the quality of financial management. Indeed, he says finance teams in the most challenged organisations have worked hard to contain and improve their positions, and they account for the bulk of the improvement in financial performance in the last few months of the year.

In most cases, the variation is more closely linked to CCGs’ financial heritage.  Some CCGs have inherited substantial surpluses and continue to underspend. At the other end of the spectrum, while no CCG inherited a deficit, a number have taken over organisations with long-standing problems often affecting the whole local health economy.  These CCGs will require significant corrective action to bring spending patterns back in line with available resources – a process that cannot be completed overnight. 

CCGs in deficit

Overall, 19 CCGs ended the year with a deficit.  Nine CCGs had agreed planned deficits at the beginning of the year, but two were able to improve their position and achieve a surplus. However, 12 had unplanned deficits.

Mr Baumann points to the strong correlation between CCGs in deficit and those under their target allocation. ‘It is no coincidence that 18 of the 19 deficits have arisen in CCGs receiving less than the funding formula suggests that they need,’ he says. ‘ That’s why we have begun to address this in 2014/15 through our allocation pace of change policy, but inevitably this will take some time to take full effect. 

‘I wouldn't regard all of the 19 CCGs with deficits as organisations that have major shortcomings in financial management, any more than I would say that all of the ones with large surpluses are paragons of excellent financial management. In many cases, it’s more a reflection of the cards they have been dealt.’

Many CCG chief financial officers are in their first finance director role, and some commentators warned that their relative inexperience could be an issue. ‘A number of people said we would end up losing control but I don't think that has happened at all. Financial management is well up to the standards of the past and in some areas there has been real improvement,’ Mr Baumann says.

So, what about the issue of specialised commissioning, which overspent by almost 3% (£377m)? ‘We’ve taken action to strengthen the financial management of specialised commissioning as the year has progressed, especially with the creation of a dedicated finance leadership group bringing together the key players from around the country.

But clearly financial delivery in this area has been our major weakness in this year of transition,’ he says.

When NHS England took over specialised commissioning in April 2013, significant changes were made – the scope of specialised services doubled in size, commissioning teams were restructured to provide single-point management of each provider, access criteria were levelled up to ensure consistency nationally, and changes were made to ensure consistency of service specifications.

Mr Baumann admits that, in retrospect, the combined impact of these changes was underestimated. This was compounded by simultaneous changes to the legislation governing access to the key information historically used to control activity invoiced under provider contracts.

‘There is no doubt that we underestimated the challenge,’ he says. ‘And it meant we were tied up with sorting out baseline issues, information flows and contracting disciplines rather than focusing on more strategic issues such as QIPP strategy and delivery.

‘Looking forward we now need to move quickly to deal with what is a completely unaffordable level of growth in these services. If we allow this growth of 5% to 6% a year to continue, we will have no alternative but to rein back expenditure on other services, and there will be an inevitable impact on our ability to invest in out-of-hospital services in line with our strategy.

‘Growth in specialised services has always been relatively fast and volatile, but in the past you wouldn't have seen it, as most PCTs with challenges in specialised care would have offset those with underspends in other budgets, particularly primary care. The problem is not new; it’s just more visible, and of course much more urgent now our resources are so tight.’

The introduction of the better care fund in 2015/16 is a further challenge for both CCGs and provider trusts. While recent media talk of the demise of the better care fund is overstated, NHS England has recognised there is some way to go before it can be assured that robust, deliverable plans are in place.

Chief executive Simon Stevens recently told the Commons health committee that a ‘frank conversation’ was needed on what can be achieved locally. NHS England had said the amount taken from commissioning budgets was the equivalent of a 15% reduction in emergency admissions.

Some commentators took this to mean the NHS had to make these admissions reductions in 2015/16, but Mr Stevens insisted the funding could be sourced from a broad base. And he added much of the funding would continue to be spent in the NHS (in community or secondary services), as well as in social care and other non-NHS organisations.

Mr Baumann says the better care fund is arguably the biggest challenge he has seen in his seven years in the NHS. One of the big issues is quantifying the benefit that can be gained – the return on investment.

‘We need that return to be quantified, as we cannot afford to take £2bn out of the system and get no return for it,’ he says. ‘There may not be the prospect of a one-for-one return in terms of avoided cost, at least in the short term, but the current plans have too much variability in this respect, and there is considerable inconsistency in the ability to articulate a clear return on investment.’

Gradual pace of change

There will be an extensive assurance process, and NHS England is offering support, but the process will take a few months, he says. ‘As well as satisfying health and wellbeing boards and ministers, both of whom have a legitimate interest in this, we need to remember that commissioners are accountable for this NHS resource. So before plans are signed off we need to be assured that every pound spent will demonstrably generate value for money.’

The better care fund plans sit within a wider process of five-year planning being undertaken across the NHS. Work on these plans, designed to drive up outcomes for patients while tackling the £30bn efficiency challenge over the period to 2020/21, puts into sharp focus the two key challenges for the future – productivity and transformation.

He says: ‘Essentially there are two big questions the finance community as a whole  needs to address – how much can we get out by tackling productivity and what’s the economic impact of the strategic transformation, which we need to implement as much for quality reasons as to plug the financial gap.’

On productivity, the sector needs to come together to determine how it can make a step change in the pace of progress.

‘The real question is: how can we unlock productivity gains at a faster rate, what is the real potential for transformational productivity gains, and can we make a leap forward rather than advancing in slow and increasingly painful steps? We owe it to ourselves, and to the taxpayers who fund us, to demonstrate that we have maximised productivity, but at the moment we are not agreed on how we measure and demonstrate productivity, let alone how we transform it.’

NHS England will be undertaking urgent work with its national partners on these issues over the next few months. The service also needs to know the individual and combined impact of initiatives such as integrated care, greater centralisation of specialised hospital care and  24/7 services. A programme of work is under way to support commissioners and providers by providing thought leadership and economic modelling in these areas.

Mr Baumann believes it’s important the answers to the big questions – on securing short-term financial balance, making a success of the better care fund and transforming productivity, for example – are found by all parts of the finance community working together.

‘If we don't, we are on a hiding to nothing,’ he says. ‘A model that sees individual commissioners solving these problems in isolation from – or, worse, in competition with – fellow commissioners, providers and other partners will no longer work in the short term, let alone build a sustainable future.’

At national level, Mr Baumann and his team are working increasingly closely with the Commissioning Assembly finance working group, which brings together clinicians, general managers and finance professionals from CCGs and NHS England to tackle financial issues of common interest.

They are also forging stronger ties with Monitor and the NHS Trust Development Authority in areas such as the planning process, challenged economy solutions and pricing. A new and important area for development is the link to local

authority finance leadership. Crucially, similar partnerships are also being built at a local level around the country.

Role of FFF

Finance professionals need to secure a strong and unified community. But the transformational agenda adds its own challenges. This will require the development of strategic capabilities befitting a £100bn public service with a scale, scope and complexity bigger than most leading multinationals, he says. This is where the Future focused finance initiative comes in.

FFF, and in particular the Best possible value work stream Mr Baumann is leading with Caroline Clarke, is designed to ensure the NHS gets the best possible value for money invested.

‘It’s about equipping finance across the NHS and social care partners to make evidence-based decisions – to understand and maximise return on investment, to assess the financial impact of the many options for strategic change open to us, to build the business models we need to implement them successfully and to throw a clear light on the opportunities for productivity improvement.

‘And we need to acquire these skills at pace if we are going to make a success of the better care fund, the £30bn challenge and our wider aspirations for a world class health system.’

There is no shortage of things to do. After a successful first year, the commissioning sector has its work cut out to sustain its performance over the next couple of years while building and delivering a sustainable future. Mr Baumann sees a central role for the finance function in every aspect of that ambitious agenda and is confident that it will step up to the challenge. ‘We are a strong professional community with a history of working together. Future focused finance will help us stay on top of our game at a time when the NHS needs us more than ever.’