As the NHS continues to wrestle with mounting financial pressures, a new analysis has cast doubt on the core logic behind how capital and operating budgets are allocated across trusts, suggesting that current incentives may be funnelling critical investment away from where it’s actually needed.
Under NHS England’s new leadership, there’s a growing push to tie funding more closely to performance. Trusts that hit revenue targets or perform well in areas like emergency care are being rewarded with capital boosts. But critics warn this performance-based model risks becoming a distortion, not a driver, of fairness and efficiency.
Recent research from two healthcare consultancies has challenged the foundations of the incentive scheme. Their findings suggest that capital funding is being disproportionately awarded to financially stable trusts, despite evidence that those running deficits often have greater infrastructure and maintenance needs. In effect, money may be flowing to organisations with the least pressing capital requirements.
The analysis also highlights how the incentive structure, focused on a single year’s performance could promote short-termism. Longer-term “spend-to-save” projects risk being shelved in favour of quick-return initiatives designed to hit annual metrics.
Crucially, the system’s reliance on incomplete data is a fundamental flaw. While estates backlog reporting has improved, major gaps remain in areas like equipment and digital infrastructure. As a result, the capital allocation process lacks a full picture of actual need.
The consequences are already surfacing. Integrated care systems with some of the worst maintenance backlogs have seen their capital budgets cut, including one trust where patients were evacuated after a ceiling collapse in critical care.
Meanwhile, efforts to return to a more rules-based financial system are running into complications of their own. NHS England has officially dropped the cap on earnings from elective work, a move broadly welcomed by trusts and independent providers. But uncertainty persists over whether similar controls will resurface under different names.
Many providers argue the payment system itself remains fundamentally broken. Tariffs, the standardised fees paid for clinical activity are based on prices from 2019-20 and no longer reflect today’s real costs. An increased efficiency adjustment further reduces how much trusts receive per procedure, embedding a hidden savings target into every payment.
Block contracts for services like emergency care, introduced during the pandemic and still in place today, have become especially problematic. Several major trusts say these funding arrangements are now dangerously disconnected from actual activity and demand, leaving essential services chronically underfunded.
Even with promises to recalculate tariffs using updated data next year, there is little confidence that this will close the funding gap. Without a more needs-based, transparent and responsive financial system, the current approach risks deepening instability across the NHS just when it needs clarity and support the most.
