Planning guidance: system default

Underlying deficits

While much of the focus has been on reducing and eradicating in-year deficits over the past few years, there has been a feeling that, while this work is vital, there is an elephant in the room – historical debts.

Providers are expected to recover historical deficits. Deficits from previous years can also lead to cash shortages for providers, meaning they have to borrow from the Department of Health and Social Care to meet ongoing costs.

The scale of these underlying debts was highlighted last month in the National Audit Office report NHS financial management and sustainability, which said that, by March 2019, providers had built up £10.9bn of debt in the form of interim support loans from the Department. Interim support, available to providers to help them meet their liabilities, had grown from £2.25bn in 2015/16 to £5bn in 2016/17 and £8bn in 2017/18. Normal course of business loans – financing arrangements based on trusts’ ability to service the debt – remained steady at around £3bn a year.

The loan profile and interest payments were such that there was little prospect of the interim support loans being repaid. The NAO said 17 trusts had loans that exceeded 20% of their 2018/19 turnover. Indeed, some simply refinance loans by taking out a further loan from the Department.

Swapping debt for public dividend capital (PDC) – one option reportedly under discussion – has a number of advantages. First, it makes the balance sheet look better, moving the loan to the bottom half and the provider would no longer have to pay back the principle of the loan. Of course, adding PDC could mean a trust will pay more PDC dividend, potentially swapping loan interest payments, which could vary between 1.5%, 3.5% or 6%, for PDC dividend at 3.5%.

However, some observers have speculated the Department could reduce the PDC dividend rate. Some providers have net negative assets, which complicates the picture. 

NHS England and NHS Improvement are currently considering ways of restructuring the loans taken before 2019/20, with chief financial officer
Julian Kelly telling the bodies’ joint board meeting in January this could happen via a debt for equity swap – hinting at issuing public dividend capital – though details had yet to be finalised.

A finance director at a trust with a significant historical debt said the move was positive. He assumed the I&E impact of paying more PDC dividend would be neutralised at national level – perhaps by changing the level of the dividend. Swapping the debt for equity would improve liquidity ratios and potentially allow future surpluses to be invested in capital schemes.

The planning guidance did bring forward a scheme to write off clinical commissioning groups’ historical debt. There is recent precedence for this in the NHS.

Brokerage owed by Scottish territorial health boards, totalling around £150m, were written off by the Scottish government at the end of 2018/19.

The level of CCG underlying debt is unclear, but the guidance says typically 50% of CCG historical debts will be written off if they are more than 4% of a CCG’s allocation. A repayment profile of the balance will then be agreed with NHS England and NHS Improvement.

It appears the proportion to be written off will be linked to historical underfunding – where CCGs have been given allocations that are less than their target funding calculated with the funding formula.

The write-off may be applied retrospectively, but if any CCG overspends its allocation in the two years following the write off, the historical liability could be reinstated.

CCGs with historical deficits of less than 4%, and have achieved or close to recurrent in-year balance, have been set a trajectory to underspend their 2020/21 allocation to help repay their historical overspends.

Vale of York, which had a significant underlying deficit at the end of 2018/19, told Healthcare Finance it was currently working out how it would be affected by the planning guidance. ‘We have yet to submit our draft 2020/21 operational plan, but we will be working with our regulators to understand the implications of this new policy,’ a spokesperson says.

A chief finance officer, whose CCG will not qualify for the write off, says the planning guidance must strike a balance between carrot and stick. They continue: ‘I’m all for writing off pointless debt that will never ever be repaid to change the focus of contract negotiations to a more positive strategic discussion.

‘But is it fair that systems that are a bit more ahead of the curve, and have used every tool they can to cashflow themselves through some really difficult problems, are then not able to qualify for the support on offer when the underlying problems still exist? As usual, timing is everything here – there are always winners and losers in every planning proposition.’

Back office

The guidance reiterates the importance of efficiency and productivity programmes created under the Releasing Time for Care banner – such as Getting it Right First Time and RightCare – and other national priorities, including the new pathology and imaging networks and e-rostering. However, it also outlines a number of requirements for finance back office and payroll.

Here again, the mantra of system by default can be seen. The guidance says all contracts for finance software, IT systems and financial services should be reviewed to ensure they align with other regional providers. This should guarantee interoperability, standardisation of services, and better use of technology. Transactional processes should also be reviewed to find opportunities for automation.

However, decisions on finance systems and contracts must not be taken in isolation by trusts – and they should not make decisions that prevent system collaboration.

A similar approach should be taken to payroll. As a minimum, where contracts are up for renewal in the next 12 months, or where payroll provision is not in contract, plans should be developed to collaborate on a system-wide basis. At every opportunity, NHS bodies should review payroll contracts and arrangements to increase collaboration, and improve workforce and service resilience. The aim is to increase quality, reduce costs and eliminate risks. Organisations must not make decisions that hamper regional or national collaboration and, when reviewing existing service arrangements, should seek to maximise collaborative opportunities to achieve economies of scale, the guidance adds.

Key financial commitments

The 2020/21 planning guidance includes a number of spending commitments alongside the promise to write off large portions of historical CCG debt. These are:

• Mental health investment standard – The guidance sets out several broad areas where mental health spending must rise. Continuing the requirement to increase spending on mental healthcare, the guidance insists each CCG’s spending must rise by – at a minimum – its overall programme allocation growth plus an increment to reflect the additional funding included in CCG allocations.

This new investment must ensure that activity commitments in strategic plans are delivered and are consistent with the Mental health implementation plan. CCGs must increase their spending in mental health providers and on children and young people’s mental health services if they are to deliver the service expansion planned for 2020/21.

CCG governing bodies must confirm they have achieved the investment standard in 2019/20. This is also subject to external verification. But if auditors find that the standard has not been met, the commissioner must recover the shortfall and plan to increase spending in 2020/21. System partners will assess CCG mental health investment plans to ensure they are credible. Where this is not the case, systems must agree action, and if the standard is not delivered, escalated to NHS England to consider regulatory action. 

• Primary medical and community health services funding guarantee – In line with the long-term plan to increase spending in these areas by £4.5bn by 2023/24, systems and commissioners should plan to spend their primary care medical (GP) allocations in full to increase the number of GPs. They must also increase overall core spending on primary, community and continuing healthcare so that they deliver system spending targets, including providing £1.50 per registered patient to primary care networks (PCNs).

Systems will be asked to support PCNs plan for the employment of an additional 26,000 staff, by helping them develop indicative plans, support recruitment and ensure PCNs are included in wider workforce planning. A breakdown of PCN additional roles for 2020/21 will include maximum allotted sums from the Additional Roles Reimbursement Scheme.

• Better Care Fund – Although planning requirements for the fund have yet to be published, the overall CCG minimum contribution to the fund will grow by 5.3% in cash terms. The total contribution will be £4.084bn. As this is a real-terms increase, it is expected that more social care packages than in 2019/20 will be funded. CCG minimum contributions to the fund have been published and commissioners should work with local authorities to plan and agree health and social care capacity assumptions.

Capital and IFRS 16

With the availability of capital funding dependant on the outcome of the spending review later this year, the NHS has been asked to plan for 2020/21 based on known funding sources and schemes. These include the sustainability and transformation partnership capital programmes and the Health Infrastructure Plan.

Emergency capital finance requests should be identified, and it is vital all currently funded plans are based on realistic forecasts – this will help NHS England and NHS Improvement see how much is available for emergency funding and other programmes. Organisational and system plans should be consistent.

The adoption of IFRS 16 in 2020/21 will mean all leases will come on balance sheet – apart from short-term and low-value leases. Leases taken out after 1 April this year will score to national capital budgets and the guidance anticipates that national capital limits in 2020/21 will be increased to account for the impact of the new standard.

The planning guidance outlines two schemes to help with capital development. The first offers more support for business cases, with a training package made available across the NHS. A portion of a scheme’s funding will be granted earlier – before full business case approval – if the national bodies are convinced of the benefits of doing so.

In the second scheme, the business case approval process will be streamlined. Alternative bid documentation will be used in place of a strategic outline case, where organisations have traditionally bid for capital through a competitive process. This will save six to 12 months, although its implementation is subject to the completion of a current pilot.

Also, the arrangement where the Department of Health and Social Care, NHS England and NHS Improvement triage cases that need additional support or, on the other hand, can be fast-tracked, will be formalised. The planning guidance adds that a single investment committee – made up of the Department, NHS England and NHS Improvement – will be created to consider major schemes, reducing the number of central approval layers.