6.5. The NHS will use the five-year funding settlement to ensure rigorous and disciplined financial management across all NHS organisations. Over the next five years, this means achieving three interrelated objectives:

• continuing to balance the NHS’ books nationally across providers and commissioners;
• reducing the aggregate provider deficit each year, with NHS Improvement committing to return the provider sector to balance in 2020/21;
• reducing year-on-year the number of trusts and CCGs individually in deficit, so that all NHS organisations are in balance by 2023/24.

6.6. Changes to payment arrangements and allocations will take better account of the costs of delivering efficient services. This will be achieved by phasing in an updated Market Forces Factor over the next five years.

6.7. Reforms to the payment system will move funding away from activity-based payments and ensure a majority of funding is population-based. This will make it easier to redesign care across providers, support the move to more preventive and anticipatory care models, and reduce transaction. We do, however, envisage retaining appropriate volume- related payments for elective care for now, alongside new incentives for improvements in quality (including patient experience).

6.8. We will move to a blended payment model, beginning with urgent and emergency care, with a single set of financial incentives aligned to the commitments in the Long Term Plan. The CQUIN framework will be reformed for both CCG-commissioned and specialised services. The scheme will become simpler, more impactful and easier for providers to implement. The revised approach will remove, on a cost neutral basis, two national variations to the tariff: the marginal rate for emergency tariff and the emergency readmissions rule, which will not form part of the new payment model.

6.9. 2019/20 will be a transitional year, with one-year, rebased control totals. The rebased control totals, which will be financially neutral in aggregate at the national level, will take into account the impact of distributional effects from any changes agreed following engagement in areas such as price relativities, the Market Forces Factor and national variations to the tariff. There will be greater flexibility for all sustainability and transformation partnerships (STPs) and integrated care systems (ICSs) to agree financially neutral changes to control totals within their systems, where this will improve overall financial and operational performance.

6.10. NHS Improvement will deploy an accelerated turnaround process in the 30 worst financially performing trusts that, between them, account for all the net total of the trust provider deficit.

6.11. As set out in Chapter One, ICSs will become the level of the system where commissioners and providers make shared decisions about financial planning, and prioritisation. Beyond 2019/20 we will introduce further financial reforms that will support ICSs to deliver integrated care. Through a process of earned financial autonomy we will give local health systems greater control over resources on the basis of a track record of strong financial and performance delivery, assessed in part through the new ICS accountability and performance framework.

6.12. We will also create a new Financial Recovery Fund (FRF) to support systems’ and organisations’ efforts to make all NHS services sustainable. As a result of this funding, we expect the number of trusts reporting a deficit in 2019/20 to be reduced by more than half, and by 2023/24 no trust to be reporting a deficit. We also expect the size of the FRF to reduce over the course of the five-year financial settlement with funding replaced by recurrent efficiency improvements delivered through multi-year recovery plans. Any FRFs released by over-delivery against plans will, where possible, be redeployed locally. The FRF will only be accessible for trusts where deficit control totals indicate a risk to financial sustainability and continuity of services, and where financial recovery plans, agreed with NHS Improvement and NHS England regional teams, are in place to deliver significant year-on-year improvement in sustainability and financial performance including NHS Improvement’s requirement of additional efficiency of at least 0.5% per annum over and above the sector 1.1% minimum requirement. This multi-year financial recovery plan, agreed with NHS England and NHS Improvement, will set out the actions required to make services sustainable at both trust and system level and agreed responsibilities to make this happen within the ICS or STP. These plans will draw on local understanding of the health system, but we expect that all systems and trusts will implement proven initiatives, including the Model Hospital, Rightcare and GIRFT and the major opportunities identified within the Long Term Plan, such as redesigning over time outpatients to be able to avoid up to a third of face-to-face outpatient visits. The FRF will mean the end of the control total regime and Provider Sustainability Fund for all trusts which deliver against their recovery plans by 2021 at the latest.