The NHS, the National Audit Office, and Performance Management – No Accounting for Failure?

Since the start of the year, the focus of my posts has been to run through the different drivers of change needed if you are serious about change in the NHS and allied public services. The WHAT of change is really important but without the HOW – as we have seen during its absence since Covid – little real change takes place.

I will continue this theme in my posts until Easter.

But today I want to return to something that I touched upon at the end of last year – the failure of current methods of performance management in the NHS.

The NHS is lucky enough to have two different centralised organisations tasked with managing its performance– NHS England (NHSE) the Department of State (the DHSC).

If you are in the senior team of an Integrated Care Board (ICB) or a major provider, you will experience the regular drumbeat of management from above trying to manage your organisation’s performance. And along with that regular drumbeat will be the irregular deluge of specific top-down management when either of these two organisations becomes highly anxious about something specific.

If I were running an NHS organisation, I am sure I would find this both overbearing and unhelpful. But since I am not, and since I am an observer of this process, the main point I would make is not just that it is unhelpful, but more significantly for the public, as a method of managing performance, it doesn’t work.

I have said repeatedly that, the trouble with NHS performance management is that it doesn’t manage performance. And since one of the most significant elements of the NHS is the ‘N’ (for National) the nation quite reasonably expects that there will be some national management of the system of delivering their health care.

For me the failure of national performance management to manage performance is as significant as the major theme of my posts this year. Over the next decade we will need the NHS to change how it works, and the management of performance will play a role in that. For the scale of change needed to happen, we need to unleash the passion for improvement that exists within most NHS staff hearts. And for that to happen, we will also need national actors to play their role.

And at the moment those national actors seem trapped in what looks rather like a high anxiety doom loop of ineffectual shouting. (That, when it doesn’t work, leads to even louder ineffectual shouting, and so on, and, with increasing volume, SO ON).

How do we know this doesn’t work? (Apart of the complaints of the senior leaders of NHS organisations that is). I offer as my evidence the problem of the outputs of that performance management system.

I know NHS national managers complain that they don’t have enough money to produce outputs, but others, including the Institute for Government (IFG) have noted that a 20% increase in doctors and nurses over the last 4 years has not led to an equivalent increase in output.

So, to see if performance management works let’s not look at inputs. Let’s look at outputs. Waiting lists have gone up, and part of my explanation for this comes from the high level of NHSE anxiety about it – leading to the ineffectual shouting.

But today I want to look at outputs of performance management of a different kind. How does the current performance management system manage public money?

There is one area that links together the management of public money and management efforts to lowering (or not) waiting lists. It is what is currently called the Elective Recovery Fund (ERF).

This blog has often discussed the payment by results (PBR) system introduced in 2002 (partly because I played a small role in developing it). I still remember how, at the time, the very idea of paying NHS organisations more money for doing more work was seen as being outside pf the way in which the NHS normally worked. That Government stuck with it however, and it played its part as one of the many incentives which brought down waiting lists.

For reasons they need to explain at some stage after the next election, between 2010 and 2019 the Conservative Government stopped this process and returned the NHS to payment by block grants. (I’ll never understand why paying organisations that do more work, more money doesn’t fit with Conservative philosophy).

However, post Covid the Government and the NHS re-introduced some sort of payment by results in the ERF scheme. Since then, I’ve been puzzling as to why a payment by results scheme that pays organisations more money for doing more work has in these last few years not led to more work.

Last week the National Audit Office helped. explain it for me. Last week’s report went so far as to qualify the 2022/23 annual accounts submitted by the Department of Health and Social Care (For any department of state this is a big deal).


The report states (p221):

3) Basis for qualified opinion on regularity due to the breach of funding conditions for the Elective Recovery Fund

The Department received £1.4 billion of ringfenced ‘Elective Recovery Fund’ funding in 2022-23, which was conditional on elective recovery targets being met. Elective recovery targets were not met and HM Treasury deemed this to be irregular. As a result, I have concluded that the £1.0 billion of conditional funding for which the required conditions were not met is irregular under Managing Public Money as HM Treasury consent is a requirement within this framework. Therefore I have qualified my opinion on regularity in respect of £1.0 billion of this funding.”

The significance of this statement might benefit from a bit of context.

After Covid the government established the ERF to incentivise trusts to increase their activity. The money was paid out on the assumption that targets for increased activity would be met. This meant the money was paid out at the beginning of the year on the assumption that the work would be carried out later in the year.

But there were supposed to be financial penalties if providers and commissioners failed to hit activity goals. So, the incentive to do the extra work was contained in the mechanism that if your organisations didn’t do the extra work the money would be clawed back.

However, the clawback mechanism was suspended over fears that this would destabilise local systems. And of course, the systems that it would destabilise would be those which underperformed on their elective work.

Since this clawback was suspended, local organisations were allowed to keep the funding in 2022-23 regardless of the number of patients they treated.

In its audit statement (p226 et seq) NAO CEO Gareth Davies writes (my emphasis),

Qualifications of my audit opinion on the regularity of expenditure

Elective Recovery Fund

      1. The Department received £1.4 billion of ringfenced funding from the Consolidated Fund, termed ‘Elective Recovery Funding’ (ERF), in 2022-23. The framework of authorities for this funding was set by HMT through the 2022-23 NHS operational planning guidance exercise.
      2. ERF was required to be ‘earned’ by Integrated Care Systems (ICSs) hitting elective recovery targets. Where elective recovery targets were not met, the cash received by the Department should have been returned to the Consolidated Fund.
      3. I received notification from the Department in March 2023 that elective recovery targets had not been met across a number of ICSs, but the associated funding had not been returned to the Consolidated Fund. The Department had requested from HMT a relaxation of the ringfence; HMT prospectively relaxed the ringfence Accountability Report 227 for the remainder of 2022-23 but did not approve a retrospective relaxation of the ringfence for the circa £1.0 billion of funding to ICSs up to that point.
      4. I have qualified my regularity opinion on the Department’s accounts in respect of the ERF expenditure of £1bn. The expenditure was not spent in accordance with the framework of authorities because a condition of the funding, meeting elective recovery targets, was not met.”

And, as the Health Services Journal (HSJ) reported in their analysis,

“The central body had “failed to establish a system of control” and showed insufficient regard to the use of public” funds the NAO said.”

A scheme that was created to pay organisations more money for doing more work had in fact just been paying people more money regardless of whether they had carried out more work or not.

Does any of this really matter?


For two reasons.

Firstly, this is about £1 billion of public money. Too often people at the top of the NHS will think “but it’s only £1 billion”. If you said that to those providing education or childcare, the notion of ONLY a billion is ridiculous. If you said it to a member of the public, paying the highest level of taxes since the late 1940s, they would be angry.

And within the politics of Whitehall, it is imperative that HMT feel that the NHS is using public money well. The management of public money is an important part of that relationship.

My second point refers to my major point about performance management. Developing an incentive scheme that incentivises organisations to do more work because they are paid more money is a method of performance management. For it to work it depends upon the organisation using it ensuring that the money only goes to those that do the work. If it doesn’t it’s not an incentive.

Consider for a moment two NHS organisations. Throughout 2022/3 one of them worked hard, bringing in all sorts of innovations to do more work. This was difficult and they received more money because they did all that extra work.

A neighbouring organisation just couldn’t manage all that change. And because of that they didn’t carry out more elective work. But never mind they received the extra money anyway.

Come next year what lessons do we think these two organisations will have learned from their experience of performance management?