Evidence submitted by the Department of
Health (Def 01)
NHS DEFICITS ENQUIRY
The memorandum of evidence for the enquiry into
NHS deficits is enclosed. This addresses the specific questions
your Committee directed to the Department of Health.
As stated in Question One of the memorandum,
I will be making an oral statement to the House on 7 June with
the provisional outturn position for the NHS in 2005-06. I will
also make available the figures for individual NHS organisations.
This information will be passed to the Health Committee at the
same time.
To coincide with my statement to the House,
we are publishing a report on NHS performance by Sir Ian Carruthers,
and a detailed finance report by the Department's Finance Director.
The Committee may also find it helpful to consider the detailed
analysis in these reports as part of their deliberations, so we
will also make these available to you as soon as they are published.
YEAR END
FIGURES
1. Based on the unaudited accounts, what
was the outturn financial position for the PCTs, NHS Trusts and
SHAs as at 31 March 2006?
1.1 The Secretary of State for Health will
inform Parliament of the position on 7 June. This additional information
will be provided to the Health Select Committee on the same day,
along with a report from the Department's Finance Director to
the Secretary of State for Health providing supporting detail
and analysis.
1.2 The figures have been subject to additional
checking, but they have not yet been audited and are still subject
to change.
2. Based on the latest data available from
Monitor, what is the projected financial position for all Foundation
Trusts as at 31 March 2006?
2.1 The Health Committee have requested
this information directly from Monitor.
MOVEMENTS BETWEEN
MONTH 12 AND
FINAL AUDITED
ACCOUNTS
3. What steps has DH taken to assure itself
that the discrepancy between the 2004-05 FIMS data and the audited
outturn figures will not recur in 2005-06?
3.1 The following paragraphs explain the
changes in 2004-05 and the action taken on by the Department of
Health to prevent a recurrence.
3.2 2004-05 was the first year in which
there was a significant movement between the final in-year monitoring
information collected by the Department of Health (based on the
draft accounts) and the final audited accounts (see answer to
question 4 below).
3.3 The Department became aware of the movements
in early August 2005 following submission of final accounts. Each
of the Strategic Health Authorities was contacted by the Department
to ascertain the reasons for the changes and the action that was
being taken. The changes can be broadly categorised as:
(i) difference of opinion between Boards
and auditors on accounting treatment and estimates. The main areas
here were:
(a) the underestimation of prescribing
creditors—as PCTs do not receive confirmation of their actual
expenditure from the Prescription Pricing Authority until after
draft accounts are prepared, they must make provision for expenditure
for the final 2-3 months of the year.
(b) the understating of the provision
for the costs of implementing agenda for Agenda for Change (AfC).
The new AfC pay system was rolled out from 1 December 2004, backdated
to 1 October 2004. During 2004-05 NHS bodies had the task of assimilating
staff onto the new pay system, and making provision for the expenditure.
Some organisations incorrectly disclosed a contingent liability
in their draft accounts instead of a provision.
(c) capitalisation and asset valuation—this
relates to expenditure which had been classified as capital in
draft accounts and subsequently reclassified as revenue, and also
understating charges relating to the down revaluation of assets.
(ii) differences between organisations concerning
the amount of income due—including within this category
adjustments made to service level agreements and levels of support.
3.4 Details by Strategic Health Authority
are given in Table 2 below:
3.5 As a result of the investigation the
following actions were taken by the DH:
— clarification and tightening of standing
accounting guidance;
— re-emphasis with SHA Finance Directors
of their professional responsibility for standards of accounting;
— inclusion of the issues arising from
the investigation in the formal guidance issued to the NHS requesting
the 2005-06 Month 12 FIMS data; and
— regular liaison with the Audit Commission
to identify any concerns that they or their auditors have.
3.6 Where the audit changes moved an organisation
from breakeven/surplus to deficit the Chief Executive/Permanent
Secretary and where appropriate the Secretary of State wrote to
the Boards.
3.7 Discussions with both the Audit Commission
and the SHA Finance Directors have not identified any systemic
issues that are likely to lead to changes between draft and final
accounts on the scale that occurred in 2004-05. Nevertheless,
it needs to be recognised that across the 566 statutory organisations
submitting accounts there will always be some organisations where
there will be a difference between Boards and auditors on matters
of accounting judgement.
4. Based on historical data, what is the
potential discrepancy between the figures reported through FIMS
and those reported in the audited accounts?
4.1 The historical variances set out in
Table 1 below demonstrate that the extent of changes in 2004-05
was exceptional. The measures outlined above are designed to prevent
a recurrence.
5. Please provide the unaudited outturn figures
for deficits provided in May and the subsequent audited figures
for 2001-02, 2002-03, and 2003-04 and 2004-05.
5.1 The information requested is set out
in Table 3 below:
Table 3
CHANGES FROM MONTH 12 TO AUDITED ACCOUNTS
2001-02 to 2004-05
| Financial Year |
Surplus/(deficit)
reported at Month 12
| Surplus/(deficit)
reported in audited
accounts
| Variance |
| £m | £m
| £m |
| 2001-02 | 53 | 71
| 19 |
| 2002-03 | 70 | 96
| 26 |
| 2003-04 | 88 | 73
| -15 |
| 2004-05 | -108 | -221
| -113 |
| | |
|
COST SAVINGS
IN 2006-07
6. What is the value of planned savings that each trust
has to make in 2006-07 to achieve balance? At 31 March 2007, which
trusts are expected not to have recovered their deficit, including
any cumulative deficit; and what is forecast to be the value of
remaining cumulative deficit?
6.1 NHS bodies submitted their financial plans in early
April. All SHAs were required to submit to the DH the financial
plans for NHS Trusts and PCTs in April. This was slightly later
than initially anticipated because of the need to correct the
national tariff.
6.2 The plans have not yet been agreed, so we are not
yet in a position to provide figures on the level of planned savings
or the expected outturn for each organisation.
6.3 The original planning assumption for 2006-07 was
an efficiency improvement across the NHS of 2.5%. The different
starting positions and the overspending in 2005-06 means that
some organisations will need to make savings that are higher then
2.5%.
6.4 We aim to ensure that in aggregate across the NHS
the plans and supporting actions deliver financial balanced position.
All the plans are subject to detailed scrutiny covering:
— overall plan viability;
— deliverability of cost improvement plans;
— consistency of workforce and financial plans;
— affordability and financing of access targets;
— financing of capital programmes; and
— consistency of assumptions between PCTs and NHS
Trusts.
6.5 The aim is to achieve the best possible performance
from every organisation, and minimise the level of risk.
6.6 The response to DH scrutiny is being led by the newly
appointed Chief Executives of the transitional SHAs. We are not
treating the agreement of plans as an end in itself. We are treating
the discussion of financial plans as a continuing part of the
performance management process.
6.7 It is unlikely that balanced financial plans will
be delivered in three of the 10 SHAs—these are East of England,
London, and South East Coast. For these SHAs, we are providing
further intensive support led by a SHA Chief Executive on secondment
to DH, and supported by four SHA Directors of Finance from elsewhere
in the country. This exercise aims to drive further cost savings.
In those SHAs where we believe there is the greatest scope for
improvement, we expect to work very closely with the new management
teams for several months. This will include, for example, ensuring
that the cost improvement programmes are consistent with the plans
developed as part of the turnaround process. We are committed
to getting these organisations into long term balance.
6.8 We intend to achieve financial balance across the
NHS in 2006-07, so any overspending in one organisation will need
to be matched by underspending elsewhere. At this stage in the
process it is not possible to say precisely which PCTs and Trusts
are likely to over-spend.
TURNAROUND
7. Have all Trusts identified now been visited by the
turnaround teams? Please send us the reports provided by the turnaround
teams. How much have you paid the turnaround teams.
7.1 To date, the SHA Regional Turnaround Directors have
visited the vast majority of organisations (c 98%) within the
turnaround cohort. The two organisations which have not yet been
visited do not now have current or forecasted deficits.
7.2 In addition, SHA Turnaround Directors have identified
or have received requests to visit other organisations outside
of the cohort that require turnaround support. They have visited
33 organisations to date and provided advice.
7.3 The following paragraphs explain the Turnaround process
in more detail, including: organisation; action taken; turnaround
plans and; costs of turnaround.
Organisations
7.4 Following the analysis of organisations with some
of the largest deficits (the "Turnaround Cohort") referred
to as the "Baseline Assessment", a National Programme
Office (NPO) for turnaround was set up at the Department of Health
(February 2006). The role of the NPO is to provide co-ordination,
review, monitoring and scrutiny of all turnaround projects within
the cohort.
7.5 The NPO provides an independent and qualified view
as to whether Trust/PCT turnaround plans are viable and quantifiable
and, critically whether implementation translates into improved
financial results. The objective of the NPO is not to micromanage
or to add management layers to the running of turnaround programmes
but to ensure they are:
— being developed for challenged organisations;
— rigorously detailed to allow measurement and progress
to be tracked; and
— implemented within the planned time scales and
with the intended outcomes.
7.6 The baseline assessment of the financial position
of organisations with significant deficits identified 98[1]
organisations within the turnaround cohort and categorised them
in terms of their support requirements as follows:
— Category 1: Immediate priority. Urgent intervention
required to drive turnaround.
— Category 2: Additional expertise/resource needed
to support turnaround.
— Category 3: Drive/focus. Maintain high priority
of actions.
— Category 4: Encourage to share what works and
deliver easy wins.
Figure 1
The chart below shows the number of organisations under each
category (as at 16 February 2006)
Action taken to date
7.6 The top priority for the national turnaround work
is to deliver a recurrent balanced monthly run rate in individual
organisations (ie when expenditure equals income on a sustained
basis and the deficit has therefore stopped growing). As part
of the infrastructure to support the delivery of turnaround, private
sector Turnaround Directors were appointed to each of the SHA
regions across England.
7.7 In summary[2]
the role of the regional Turnaround Director is to:
— manage and co-ordinate the turnaround initiatives
of organisations within the region (in agreement with the SHA
CE) and to facilitate the delivery of comprehensive turnaround
plans;
— ensure there is no trade off between achievement
of financial targets and delivery of national clinical service
priorities;
— support management in assessing and managing the
performance and delivery of turnaround resources within challenged
organisations;
— support line management in agreeing a turnaround
action plan with challenged organisations;
— work with Boards (especially Chairs and Non-Executive
Directors) to understand the need for and ownership of turnaround;
and
— work with the NPO to put in place a process for
the SHA to monitor and assess progress against plans.
7.8 The initial focus of the NPO in conjunction with
the SHA regional Turnaround Directors has been to ensure that
organisations in the cohort identified as requiring "urgent
intervention" or "additional expertise" source
the appropriate external support in order to assist them in the
development of robust credible turnaround plans.
7.9 The progress of "support status" for organisations
across the cohort has been measured at a high level by applying
a Red, Amber, Green assessment, where:
— Green: Organisation has appropriate resource/support
to deliver required turnaround plan.
— Amber: There is a clear process in place to procure
appropriate resource/support or review is in progress to assess
support requirements.
— Red: Additional resource/support is required to
deliver required turnaround plan and is not yet in place, or assessment
of support requirements is not yet complete.
Figure 2
The diagram below shows a summary of the support status across
the turnaround cohort and the graphs show the progress of organisations
sourcing turnaround support by category (as at 18 May 2006):
7.10 As at 18 May 2006, of the 26 category 1 organisations
requiring "urgent intervention", 25 Trust/PCTs have
in place or have already received turnaround support from a combination
of professional turnaround advisors from the big four accountancy
firms and/or independent Turnaround Directors. The remaining organisation
is actively in the process of sourcing support. Of the 37 category
2 organisations requiring "additional expertise/resource"
to support their turnaround effort, 32 currently have support
or have received support in the form of a Turnaround Director
(independent or internally sourced) or have professional turnaround
advisors in place.
7.11 Across the cohort, there are 31 Trusts/PCTs with
independent Turnaround Directors working with them and a further
17 organisations with a dedicated internally sourced Turnaround
Director leading turnaround (as at 18 May 2006). This number may
increase over the next few weeks as organisations continue to
clarify their support requirements.
Figure 3
The following table shows the number of organisations who
currently have (or have had) turnaround support in place (as at
18 May 2006).
Turnaround plans
7.12 The NPO have received a number of draft outline
Turnaround plans from organisations within the cohort. The NPO
are reviewing the appropriateness of plans, which includes for
example:
— evidence of robust process behind the development
of plan;
— engagement of external stakeholder group;
— clarity and definition of projects;
— process and structure for delivery of plans;
— evidence of external challenge/experience;
— risk assessment and risk management strategy;
and
— insight into implementation plan.
7.13 Once all plans are received and underway, it will
be possible to report the projected savings across the cohort
and by each region.
7.14 The NPO will be monitoring, managing and challenging
the implementation of the Turnaround plans and will be tracking
for example:
— cost savings achieved against target;
— progress against milestones;
— risks/issues relating to implementation; and
— overall financial performance against the plan
(including monthly run rate information, year to date/outturn
performance and deficit information).
Cost of Turnaround
7.15 The DH has covered the costs set out in (i) to (iii)
below:
(i) Baseline Assessment (ex VAT and Expenses):
Phase 1—£1,493,500
Phase 2—£1,092,400
(ii) National Programme Office (ex VAT and Expenses):
Average £177,000 per month (since February 2006)
(iii) SHA Turnaround Directors (ex VAT and Expenses):
£390,000 per month (since February 2006)
7.16 We do not yet have finalised figures for the local
cost of turnaround support.
8. How has progress on implementing KPMG's recommendations
been monitored and measured? Please provide a summary of what
progress has been made to date?
8.2 As explained in answer to question 7, a National
Programme Office (NPO) was set up following the baseline assessment
of those organisations with significant deficits. The NPO have
programme management disciplines in place to monitor and manage
turnaround organisation within the cohort and produce weekly reports
on progress of these organisations.
8.3 The NPO produce a written weekly report to the Turnaround
Task Force (TTF) summarising turnaround progress and highlighting
key risks and issues. There is also an accompanying weekly status
report which provides more detail of the status and turnaround
progress of all organisations within the cohort (eg status of
turnaround support, progress of development and approval of turnaround
plan, appropriate mechanisms in place for the implementation of
plan). Regular reports are made to ministers and progress and
actions challenged.
8.4 Progress to date is summarised in response to Question
7 above. Copies of progress/status reports created since the establishment
of the NPO have been provided.
WORKFORCE REDUCTIONS
9. To what extent were the SHAs and DH aware of trusts'
redundancy plans? if they were planned, how many more redundancies
will be expected? If they were not planned, what implications
does this have for the quality of 2006-07 strategic plans?
9.1 NHS revenue resources are increasing in 2006-07 by
9.2% before adjustment to cover the 2005-06 deficit.
9.2 Although all NHS organisations will need to ensure
that they are managing their workforce numbers within the overall
resources available we do not anticipate major redundancy exercises
across the NHS. Where NHS trusts are reducing posts as a means
of generating savings to reach financial balance and provide optimum
value for money they are focussing first on doing this through
turnover, recruitment freezes, reducing the use of agency staff,
and redeploying staff in different ways.
9.3 Some redundancies are inevitable, but nowhere near
the levels recently highlighted in the press, and the balance
of posts lost seems likely to be for managers and non-clinical
staff. Employers recognise the need to handle workforce reductions
sensitively and to ensure opportunities are also available for
new nursing and medical graduates. NHS Employers are working with
NHS Trusts to share best practice.
9.4 Overall, these changes are not just a result of local
financial deficits, but are a reflection of increases in productivity
due to more technology and better and more streamlined working
practices. Productivity gains may mean that fewer staff will be
needed in some areas to deliver the same healthcare outcomes.
This will be balanced by an expansion in community services as
outlined in the Our Health, Our Care, Our Say White Paper.
9.5 Between 1997 and 2005 there was an increase of 31%
in the number of full time equivalent staff employed by the NHS,
and an increase in 2004-05 of around 3%. After a period of rapid
and essential growth in the workforce to fill gaps and increase
capacity, we are now moving away from year-on-year growth in the
NHS workforce and expect numbers to broadly stabilise over the
next few years.
Patricia Hewitt
Secretary of State for Health
6 June 2006
1
There are 102 (48 Trusts and 54 PCTs) statutory organisations
within the Turnaround cohort but Ipswich PCT and Suffolk Coastal
are under joint management and are treated as one organisation,
as are Fareham & Gosport PCT and East Hampshire PCT, and the
Cumbrian PCTs (of which there are three). Back
2
A detailed Turnaround Director job specification is available. Back
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