The publication of the Department of Health (DH) annual accounts has been well reported: they showed an overspend on the allocated health budget for the year 2015/16, and a sharp deterioration of financial performance compared to 2012/13 when the department underspent its budget by £1.58bn.

Delving deeper though, there are some interesting patterns which have financial implications and also raise questions for policy and patient care; for example the accounts show NHS providers are increasingly struggling to keep up with growing demand for elective treatment. Between 2012/13 and 2015/16, purchase of health care from non-NHS bodies by NHS providers almost doubled, increasing at an average rate of 20% per year (see graph below), as providers tried to keep pace with demand.

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Despite this, new referrals are stacking up faster than hospitals can treat them, with two inevitable results. Firstly waiting lists are getting longer: the total number of patients waiting for treatment has risen from 2.48 million in April 2012 to 3.5 million in March 2016 (see graph).

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And secondly, waiting times are increasing. Providers are expected to treat patients within 18 weeks of referral, with a national target that at least 92% of patients on the list at the end of every month should have been waiting less than that time. However, by the end of 2015/16, 91.5% of patients had waited less than 18 weeks compared to 94.1% at the beginning of 2012/13. Not drastic, but still noteworthy – especially if you’re one of the people waiting longer.

Like other high-profile waiting time targets on emergency care and cancer, performance against the 18 week target has been noticeably deteriorating for some time. What makes elective care different is that NHS providers can (and do) buy in extra capacity from non-NHS bodies, but the decline in performance has continued despite substantial increases in spending on these providers. Meeting performance targets is becoming increasingly difficult and is putting extra financial pressures on NHS providers. Last year, £600m of fines were imposed due to breached performance targets. And, in the last quarter of 2015/16, commissioners were even instructed to hold onto any proceeds from fines to improve their financial position, rather than reinvest in initiatives to improve performance.

That approach hasn’t been carried over into 2016/17, but providers are likely to feel even more pressured to meet the 18 week target through the new £1.8bn Sustainability and Transformation Fund (STF).

NHS providers have been asked to agree improvement trajectories showing how they are planning to improve performance on three key waiting targets: cancer, emergency care and elective treatment. In order to receive STF money, providers will need to meet or exceed their agreed plan. 12.5% of STF funding is linked to performance against trajectory on the 18 week target.

Providers can be 1% below their agreed target and still get the STF cash in Q2, but a tighter tolerance of 0.5% applies in Q3 and there’s no tolerance for Q4. If performance isn’t good enough early in the year, it can be earned back by over-performance later in the year. So the stakes are high.

This will put extra pressure on providers to hit their performance targets. Elective care is covered by the national tariff, regardless of who provides it, but there is flexibility to pay more. And some providers may decide that agreeing a premium rate – on top of tariff – to purchase additional capacity from non-NHS bodies is a price worth paying to avoid a breach.

By 2015/16 year end, NHS providers had purchased nearly £1bn of care from non-NHS bodies, were £2.5bn in the red and narrowly failed the 18 weeks target at national level. Whether providers are getting value for money when purchasing care from non-NHS bodies is not clear, but the need to secure STF funding might lead organisations to make poor investment choices by purchasing care over and above the national tariff.

Despite the DH overspending its budget last year, the NHS is still unable to meet rising demand while maintaining the same quality of care. The need to develop a clear plan on how to improve and maintain quality of care while improving efficiency is now crucial in order ensure the sustainability of our NHS.

Tim Gardner (@TimGardnerTHF) is a Senior Policy Fellow at the Health Foundation
This blog was co-authored by Sarah Lafond (@SarahLafond13), a Senior Economics Analyst at the Health Foundation

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