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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