The solvent business operates under the realism that cash is sanity and profit is vanity. You cannot pay the bills with profit. So, cash is (and has always been) king, in business, but is it the same in healthcare? Frontline professionals or services generate cash, and they consume it. A single service can influence financial flows in the millions and so it is vital that leaders understand these important distinctions and the perversions caused when they aren’t respected. And they aren’t respected.
SIGNIFICANT NEWS APPEARING BENIGN
I wish to begin with news that has emerged this week about payment of providers. It might appear like the least of issues in the general melee of the NHS today but for anybody understanding finance, it should ring many alarm bells. It demonstrates, based on data provided by the regulators, that a whopping 44 out of 135 acute trusts paid less than half their invoices on time in the 2017-18 financial year.
Is that really that serious?
It is when you consider that YOU are a service provider, with a standing monthly invoice which you prefer to call a salary. You expect that invoice to be paid because you rely on it to pay your own bills. I am pretty sure you also run the belief that it is secure too, because it’s the NHS, right? Backed by the Department of Health & Social Care, in turn, funded by the Treasury, isn’t it? Well, let’s return to the title – cash!
We make the distinction between cash and what the books say for the specific reason that, no matter who you are, you pay people in cash. If St Elsewhere comes to you at the end of the month and says the following “Dr Smith, you’ll be really pleased to know that the books have balanced again and we’ll give you some more cash in a few months time”, I am guessing you’d be less than pleased. So, why can such news about supplier payments slip by with so little alarm? Predominantly for two reasons – a misplaced belief alongside a grave misunderstanding. It’s why EVERYBODY needs to understand finance.
IS THE NHS INSOLVENT?
It’s true to say that the NHS does enjoy a level of protection greater than a private or even public company. If you examine the early narrative in the annual accounts of a hospital trust, you’ll find a statement along the lines of “these accounts have been prepared on the basis that X trust is a going concern and will continue in operation for the foreseeable future”. That they enjoy enhanced protection is evidenced by the fact that, in an increasing number of instances, if they were a company they would be deemed insolvent. They have balance sheets in significant deficit, they run a budget deficit, they have increasing creditors and… they pay their suppliers later and later on average.
So, are they insolvent?
In public sector terms, probably yes, but in official, accounting terms, not really. If they were, you’d see a mandatory set of principles kick in, with the organisation run on a limited basis only if it was felt by the administrators that a solution could be found. If not, the doors get closed. Under these insolvent terms, the creditors have to get treated fairly and typically the organisation can’t choose how it wants to use any lingering funds. There are rules and directors get prosecuted for breaking them. But the NHS does just that. It is currently breaking the law, by choosing to pay suppliers late… because… cash is king and if you haven’t got any, you can’t use it to pay people.
That this is a real issue should be crystal clear after the collapse of Carillion, a provider to the NHS that was notorious for paying suppliers late. What Carillion demonstrates is that when this goes unaddressed, ultimately it leads to collapse and closure, as suppliers withhold vital supplies, leading the organisation to fail in its obligations and consequently, its income to dry up. It’s a downward spiral. But the NHS would never find itself in that position, right?
The NHS has statutory obligations to pay suppliers within 30 days. Not doing so is a slippery slope. Deliberately not doing so is an illegal act. To reinforce this, alongside the alarming data, the DHSC has stated publically that it does not condone the practice of late payments. But in much the same manner as “the cheque is in the post”, it’s just not true.
The primary regulator of trust financial performance, NHSI, has been encouraging trusts to defer payments any way they can, whilst hypocritically gasping in horror when they do just that. In fact, in perhaps the most brazen of hypocritical acts, it employed into a senior role within NHSI, the financial director of Barking, Havering & Redbridge University Hospitals NHS Trust, now famous for blatantly deferring millions of supplier payments.
That complicity goes far further than mild encouragement. NHSI created a payment incentive scheme that practically guaranteed trusts would pay late, whilst also finding any excuse not to even post bills to the accounts. That scheme, known as Sustainability and Transformation Funding, set financial control targets for trusts, which, if they remained within them, brought vital funding. If they didn’t, they missed out and, in a particularly misguided twist, the money saved from those missing out was divided amongst the ones deemed compliant. In one fell swoop, NHSI created the perfect storm of conditions in which it did not pay, to pay.
It doesn’t cease there.
Faced with cash shortages, trusts asked to draw on short-term loans from DHSC, mediated through NHSI. The more austerity prevailed, the greater the level of loans drawn down. In the 2017-18 financial year, NHS providers borrowed £3 billion in order to keep the lights on… and STILL that resulted in a rapid deterioration of average payment times. Let’s be clear, they were sufficiently short of CASH that they just had to have £3 billion, but that £3 billion wasn’t sufficient to pay suppliers. To be equally clear, this isn’t a theory, it’s an undisputed but under-discussed reality.
Re-enter NHSI, who are complicity again in what to those understanding finance see as a true catastrophe in the making. As financial scarcity started to really bite, NHSI was very clear that short-term, working capital loans would only be provided under exceptional circumstances, for instance, where essential suppliers with refusing to provide essential supplies. Whichever way you dress that up, it’s saying don’t pay suppliers until you are in so much trouble that you’re going all ‘Carillion’ i.e. unable to continue with your job, and even then, choose which ones to pay – a wholly illegal approach to creditors if you aren’t state-sponsored.
But DHSC and NHSI had no choice. Why? Because cash is king. They can’t loan you what they haven’t got, and that’s where the real alarm bells should start ringing.
AN EMERGING REALITY
Today, the chief executives of both NHS England and NHS Improvement, Stevens and Dalton, stated very clearly that health economies which are struggling financially will have to make “difficult choices and trade-offs” as national NHS chiefs seek to deliver a break-even position in 2018-19.
That’s like neither a profit nor a loss?
Correct. It’s also an accounting principle. Remember, cash is sanity and profit is vanity. Stevens and Dalton are saying because WE want to balance the books and look OK to the Treasury, YOU are going to be starved of cash. And yes, that’s AFTER that apparently big settlement you were promised just a few months ago. It’s perfectly possible to reach breakeven under even the most dire of circumstances. Simply find ways to avoid handing over cash, whilst also working out how to avoid even putting bills into the system. You can also delay employing people to vacancies, understaff shifts and cancel stuff. How well as that worked out for Barking, Havering & Redbridge?
What you can’t change is the underlying reality. We say cash is king for a reason – it’s real. All of the above positioning is highly destructive to workforce and patients because it hides reality, which in turn denies us a much needed authentic solution. That reality is that demand is increasing, the clinical workforce is declining and the estate is falling to bits as we refuse to part with cash called capital. But much like Carillion, at some point, the merry-go-round comes to a grinding halt, unless cash can be found. And cash is in rather short supply.
Far too few understand NHS finance, its flows, cash and the myriad of influences on service-level finance. Ironically, this enduring reality places many more individuals at personal risk too. As a service leader, it’s an imperative to understand both how it all works and its current, true state of play. It was this uncomfortable reality that led to the formation of the Academyst Finance & Financial Management for Clinical Professionals course many years ago, and it has pretty much run at capacity ever since.