The NHS deficit is unprecedented and unsustainable. All eyes are on the forthcoming Comprehensive Spending Review and on some promising ideas for reform, explain Professor Kieran Walshe and Professor Judith Smith.

The first quarter financial returns for the NHS, published just after the Conservative Party conference in Manchester, are the worst ever. Trusts were £930m in deficit after just three months of this financial year and The Chartered Institute of Public Finance and Accountancy had already predicted a £2.1bn overall deficit for the NHS this year, two and a half times last year’s record £820m deficit. The latest published figures suggest the situation by the end of year may be even worse than that.

Most NHS trusts and foundation trusts, including those that have been financially secure in the past, are forecasting substantial losses. The government’s response has been to issue edicts seeking to restrict spending and micromanage NHS organisations, and to blame the overspend on expensive agency staffing costs (which in reality is just a small part of the financial problem). With half the financial year already gone and winter pressures ahead, it seems very unlikely that any control measures implemented now can halt, let alone reverse, the financial crisis.

The deficit results largely from four years of virtually zero real terms growth, rising emergency care demand, cuts in social care spending that shift costs into the NHS, and increased nurse staffing levels in response to the Francis inquiry.

The NHS has survived some tough financial problems before, but much of the NHS organisational architecture and management capacity that used to deal with these pressures and broker local solutions was foolishly stripped out of the NHS in the Lansley reforms of 2012. There is no clear leadership at a regional level of the health system, and Monitor, the NHS Trust Development Authority, and NHS England seem to be overwhelmed by the scale and pace of the financial problems.

During the 2015 general election campaign, the Conservatives promised to fund in full the extra £8bn a year that NHS England said was needed for the NHS by 2020 – but failed to say when this would arrive. We therefore await the publication of the Comprehensive Spending Review on 25 November with great interest. On the one hand, if the NHS does not get a large part of that extra £8 billion pa upfront, the financial crisis will see NHS trusts running out of money in 2016, and starting to make major cuts in services and abandon performance targets. On the other hand, the government is understandably wary of giving the NHS more money without guarantees of a return on investment in terms of real service reforms, especially at a time when other public services continue to suffer swingeing real terms cuts.

There are two promising ideas in play which could support that kind of substantial service reform. Firstly, the Treasury has started to engage, apparently seriously, with the potential for radical devolution of health budgets to local government, opening the way to real integration of health and social care spending. Secondly, NHS England has set up a raft of ‘vanguard’ sites to develop and test the new models of care sketched out in the Five Year Forward View.

Plans to devolve control of about £6bn of health spending a year to local government and NHS leaders in Greater Manchester have excited much debate, partly because they seem to reverse a decades long trend of centralisation of power within the NHS. Other areas are now seeking similar devolved powers. Although it is too early to know what difference devolution might make, we can look to other countries (in the UK and Europe) to see health and social care services that are less fragmented and better led by democratically accountable local stakeholders.

Although devolution is unlikely to save money in the short term, it could provide a politically safer and more sustainable context in which to make the radical changes implied by the Five Year Forward View. Local authorities can claim a rather better record of fiscal self discipline and tough decision-making than NHS organisations, especially in recent years.

NHS England’s programme of vanguard sites is now up and running, with substantial resources to invest in system reconfiguration and in evaluation. Equally importantly, there are changes emerging through locally led innovation, for example new ‘super partnerships’ of primary care doctors and integrated care organisations that straddle primary, social and hospital care. It seems that, at last, service (rather than structural or organisational) change is being encouraged and supported, of a kind that can excite and engage clinicians and managers. Again, the new models of care are unlikely to save much money in the short term, but have the potential to reshape services and make them more affordable in the longer term.

An important barrier to these changes is the Health and Social Care Act 2012. Devolution and the vanguard models of care cut right across the logic of competition and choice embedded in the legislation, which sooner or later will have to be substantially rewritten. The organisational structures and processes established by the Act already look dated, and there is a real risk that these changes, entailing collaboration across health organisations, will get mired in legal challenges based on the Act from others who lose out.

The government must tackle head-on the severity of the financial deficit facing the NHS, probably by committing new upfront funding in the Comprehensive Spending Review. It should insist that the NHS embraces real service reconfigurations and change through the new care models and devolution arrangements and it should support local health economies through these transitions, including changing legislation where that is needed. In return, NHS managers and clinicians should seize the opportunities provided by the new care models and devolution to make service improvements that will make a real difference to patients.

An earlier version of this blog was first published as an editorial in the British Medical Journal.