Select Committee on Public Accounts Seventeenth Report

1  Financial Standing of the NHS

1. In 2004-05, the NHS in England received funding of £69.7 billion, rising to £76.4 billion in 2005-06 and to £92.6 billion in 2007-08. Over this period, spending on health is the fastest growing area of public expenditure.[2]

2. The financial duties of NHS organisations require Strategic Health Authorities and Primary Care Trusts to contain expenditure within approved revenue resource limits and NHS Trusts to break even.[3]

3. The key financial target for the Department in all financial years is to deliver financial balance across all NHS bodies. In 2004-05 the Department did not meet this target and, for the first time since 1999-2000 the NHS failed to break even overall. The aggregate deficit, including NHS Foundation Trusts, was of £251.2 million, representing 0.38% of the total revenue expenditure of £66.3 billion. 168 NHS bodies (including Foundation Trusts) out of 615 (27%) recorded a deficit or overspend. There was an increase in the number of bodies with a deficit or overspend compared to 2003-04 (when 17% of bodies reported a deficit), and more of these deficits were significant in size.[4]

4. Audited year-end figures for 2005-06 show that the aggregate overspend for all NHS bodies, including NHS Foundation Trusts, increased to £570 million representing 0.74% of total expenditure.

The NHS had an overall deficit of £570 million in 2005-06, only the Strategic Health Authorities show a surplus

Source: National Audit Office

190 NHS bodies (including Foundations Trusts) out of 599 (32%) recorded a deficit or overspend, up by 4 percentage points from 2004-05. The number of significant deficits also increased.[5]

Source: National Audit Office

5. In addition to in-year deficits, NHS Trusts can have cumulative deficits from the past. Trusts have a statutory duty to recover such deficits and break even within three to five years. As at 31 March 2006, the aggregate total of these cumulative deficits across NHS Trusts was over £1.1 billion, up from £598 million at 31 March 2005. In addition, the number of NHS Trusts failing in the break even duty had risen from 1 to 12 as at the end of the 2005-06 financial year.[6]

6. In 2006-07, the Department aims to achieve financial balance across the NHS, excluding Foundation Trusts. The plan is that there will be a reduction in the number of individual bodies reporting a deficit or overspend, and fewer of the deficits and overspends will be significant in size. Strategic reserves have also been created to provide financial flexibility at a regional level. The Department is dependent on the Strategic Health Authorities to negotiate the level of contribution to these reserves from each Primary Care Trust, and to ensure that the financial solvency of successful Trusts is not put in jeopardy by support for organisations in financial difficulty. The contributions would be repaid on return to financial balance. The repayment period would vary depending on the organisation but would be unlikely to stretch beyond five years.

7. The Department is expecting a surplus in the region of £250 million for 2007-08 with an increased surplus expected for 2008-09. Forecast financial data for 2006-07, released at the end of June 2006, indicated a surplus of £18 million for the NHS, excluding Foundation Trusts, and after applying the £350 million reserve held by the Strategic Health Authorities. A reduction in the number of bodies reporting a deficit and the value of those deficits was also forecast.[7]

8. Updated forecast information released at the end of quarter two suggests that financial performance is deteriorating. At the end of September 2006, the Department was forecasting an overall deficit of £94 million after the application of the £350 million reserve. The Department plans to offset this deficit by adding a further £100 million, released from NHS bodies delivering a surplus in 2006-07, to the reserves held by Strategic Health Authorities.[8]

9. In 2004-05, auditors appointed by the Audit Commission qualified the accounts of one Strategic Health Authority and 92 Primary Care Trusts as these bodies had incurred expenditure in excess of their resource limits. In 2005-06, the number of qualifications relating to excess expenditure increased, with the accounts of one Strategic Health Authority and 110 Primary Care Trusts being qualified in this manner. In 2005-06, the auditors reported that they had concerns about financial standing at 348 NHS bodies (excluding Foundation Trusts), representing 59% of organisations.[9]

10. There was an unusually large shift between bodies' unaudited and audited financial position in 2004-05. The overall deficit for the NHS, including Foundation Trusts, moved from £133.9 million to £251.2 million, an increase of £117.3 million. The three most significant causes for movements between the two sets of accounts were errors in the recorded liabilities for prescribing expenditure and adjustments to liabilities to be incurred as a result of the Agenda for Change pay initiative, and adjustments to service level agreements.

11. There is also a perverse incentive for NHS bodies (other than Foundation Trusts) in deficit to underestimate its size in their unaudited accounts since the deduction to resources in the following financial year is based on the unaudited deficit. Any significant difference between the unaudited and audited position is adjusted in the year after. Until 2005-06, there was a further incentive for bodies to underestimate deficits in their unaudited accounts since the Healthcare Commission's "star rating" assessment of financial balance was based on unaudited figures. There is no such incentive under the annual health check introduced from 2005-06.[10]

12. Auditors reported evidence of inappropriate adjustments and/or omissions in 125 NHS bodies' accounts (21%) in 2004-05. In the case of Scarborough and North Yorkshire NHS Trust, management had disregarded the auditor's advice and had employed inappropriate accounting adjustments in order to achieve financial balance. The Department are to instigate disciplinary action against the Chief Executive and Director of Finance of the Trust. The Department did not believe that other NHS bodies had deliberately manipulated or falsified their accounts. They maintained that the shifts between the unaudited and audited accounts were due to differences of judgement between management and the auditors, which were to be expected as a result of the audit process. The movement between unaudited and audited accounts in 2005-06 has been much lower, at £34.3 million. [11]

13. The differences between unaudited and audited accounts raises more general concerns about the quality of financial information used by some NHS bodies for management and financial reporting. At an individual body level, not recognising the true financial position may mean that necessary corrective action is not identified and taken. At Strategic Health Authority and national level, it makes the monitoring and management of the position more difficult. Auditors have highlighted concerns over financial standing at a number of NHS bodies with common themes including poor financial and strategic planning, inadequate monitoring at Board and operational level and weak governance arrangements. Strategic Health Authorities and the Department monitor the financial performance of Health bodies, excluding Foundation Trusts, based on monthly returns. Although there is currently no requirement for these bodies to provide periodic in-year balance sheets and income and expenditure accounts, which is good practice elsewhere, the Department acknowledged that this requirement may need to be introduced in order to meet the timetable for "faster closure" of the Department's accounts and to improve cash management.[12]

14. The Department stated that the record levels of NHS funding of recent years had resulted in benefits in terms of reduced waiting times and action against coronary heart disease and cancer for example, and that most if not all the NHS major performance objectives had been delivered. Work by the Office for National Statistics using measures adjusted for issues such as increases in the quality of care showed that NHS productivity had increased by 1.6% on average per year over the last five years. The Department conceded that this increase needed to be improved upon.[13]

2   C&AG's Report, Summary, para 2 Back

3   C&AG's Report, Appendix Two Back

4   C&AG's Report, Summary, paras 4-5; paras 2.8-2.15 Back

5   Department of Health, NHS organisations audited final accounts surplus, deficits or breakeven position, 2005-06 Back

6   C&AG's Report, Summary, paras 5, 2.12; paras 3.9-3.12; Department of Health, Annual Report to the NHS Summarised Accounts 2005-06, para 44(b) Back

7   Qq 43-46, 93, 104-109, 17-175, 200-201; Department of Health, NHS financial performance Quarter 2, 2006-07 Back

8   Department of Health, NHS financial performance Quarter 2, 2006-07 Back

9   C&AG's Report, Summary, paras 21-23, 28; paras 4.2-4.7, 5.2 Back

10   C&AG's Report, Summary, paras 24-25; paras 4.25-4.28; Oq 24, 176 Back

11   C&AG's Report, Summary, para 25, 4.26; Qq 25, 99-103, 110-116; Ev 24 Back

12   C&AG's Report, Summary, para 25; paras 4.10, 4.27; Qq 70-72 Back

13   Qq 1, 47-48, 199 Back

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Prepared 20 March 2007