Select Committee on Public Accounts Seventeenth Report

2  What are the factors leading to organisations being in financial deficit?

15. There is no single cause of deficits. Although poor financial management can be a contributory factor, it is not the sole cause. NHS organisations are subject to a number of financial pressures which are complex, and not always within the control of individual bodies. All organisations have faced costs pressures, but some have been able to manage these better than others.[14]

16. A number of NHS bodies reported that they experienced cost pressures arising from the need to meet performance targets and to implement national initiatives. In particular, the costs associated with the Agenda for Change pay initiative, the consultant contract and the new General Medical Services (GMS) contract had caused the NHS to be stretched financially. The Department accepted that some policies, such as those on pay reform, had not been properly costed and as a result had been under-funded. Unanticipated issues resulted in the consultant's contracts costing £90 million more than anticipated in 2004-5. The costs associated with the GP contracts exceeded the Department of Health forecasts by a further £250 million in that year. The cost of implementing Agenda for Change was £220 million more than expected in 2005-06. Taken together, these three national pay initiatives cost the NHS £560 million more than expected in 2005-06, which was inevitably a significant factor in the increase in the overall deficit.[15]

17. Fourteen Trusts have asked for contributions to costs incurred as a result of delays in the implementation of the National Programme for IT. The Department reports that information on how much has been claimed by each trust is not available as the requests include a mixture of one-off costs, ongoing costs, alternative interim solutions and unspecified amounts. The Department has not to date made any such payments.[16]

18. In some circumstances, spending by NHS bodies on planning capital projects that failed to go ahead have contributed to financial difficulties. For example, £15 million was spent on planning the Paddington Health campus scheme which was subsequently abandoned. The Department confirmed that it does not keep records on capital projects below a capital value of £25 million. Schemes below this threshold are managed locally and any write-offs should be declared in the accounts of the body concerned. The Department told us that a total of £20.2 million has been written off as abortive development costs in such schemes.[17]

19. Deficits are more prevalent in the south of England than in the north. The Department did not think that hospitals based in rural areas or operating from a number of sites had greater problems than others, arguing that other organisations managed adequately in the same circumstances. The Department also rejected claims that the allocation formula disadvantaged certain areas. One possibility was that it was more difficult for organisations in the south to find suitable management and finance staff. The Department had considered various factors but could find nothing that explained the geographical pattern of deficits. The most significant indicator of deficit in a year is a deficit in the previous year. In some cases where organisations with financial difficulties have received support in the past, the underlying problems have not been resolved.[18]

20. Previous NAO Reports have made detailed recommendations about the role of NHS Boards in delivering effective financial management, taking collective ownership of financial issues. Given the challenges which they are currently facing, NHS bodies need to take an organisation-wide approach to financial management. Delivering financial balance must not be seen as a task for the finance department alone but should also involve senior clinicians and managers.[19]

21. Auditors reported concerns about the level of resources available or the capabilities of finance staff at 28% of organisations. They also had concerns about the financial management capabilities of general management at 30% of organisations, and about non-executive directors at 25% of organisations. Such concerns raise questions about whether there are sufficient financial management skills at local level to cope with the impact of recent reforms. Most organisations managed their financial affairs adequately, but the Department conceded that some areas needed improvement.[20]

22. The Department believes that recent changes in the transparency of the NHS financial regime, including better accounting disclosures and reduced access to financial support, have made the extent of local deficits more apparent. The regime has been tightened so that, for example, the transfer from capital to revenue is no longer allowed.[21] However, in both 2004-05 and 2005-06 there was still inconsistency over how the regime was applied, with some deductions being passed down to individual Trusts with others being held at Strategic Health Authority level. The regime needs to be applied consistently and correctly to ensure a level playing field and for the effects of such support to be transparent.

23. Current funding arrangements for the NHS mean that a body's income in a given year is increased or reduced based on its prior year surplus or deficit. In the case of NHS Trusts, any deficit incurred also remains on the Trust's books as historic debt. Trusts have a statutory duty to recover such deficits and break even within three to five years. The combination of the carried forward cumulative deficit and a reduction of income in the following year is known as a "double deficit", and Trusts have expressed concerns that once financial balance is lost, the cut in income makes recovery doubly difficult.[22]

24. Strategic Health Authorities have the power to apply the regime flexibly in order to meet local circumstances. Foundation Trusts are not subject to income adjustments based on their prior year surplus or deficit, nor do they have a statutory break even duty. To this extent, Foundation Trusts in deficit are at an advantage to non-Foundation Trusts in deficit, though they are also subject to a stricter cash borrowing regime and have no access to financial support.[23]

25. The Audit Commission reviewed the NHS financial regime and reported their findings in July 2006. They found that the current approach to funding NHS Trusts was incompatible with their financial regime, as reducing income to recover past deficits was inconsistent with the concept of earning income from patient treatments under Payment by Results. The Audit Commission recommended that the Department should instead establish a national buffer to allow NHS Trusts to operate in a more sustainable way. In the Department of Health publication The NHS in England: the Operating Framework for 2007-08, the Department conceded that the "double deficit" regime applied to NHS Trusts will become increasingly unsustainable as the reforms continue. They stopped short of accepting the recommendation, however, stating that reversal of the past income deductions with the associated creation of a central buffer to absorb the impact would require additional resources from the Government. The Department made clear that no additional resources are available for this purpose.[24]

14   C&AG's Report, Summary, para 8; paras 3.30-3.31; Q 1 Back

15   C&AG's Report, Summary, para 8; para 3.30; Qq 1-3, 84-92, 129, 137-143 Back

16   Qq 132-133  Back

17   Q 134  Back

18   C&AG's Report, Summary, Figure 4; paras 40, 44; Qq 20-21, 32, 127-128, 159-160 Back

19   C&AG's Report, paras 3.40-3.51 Back

20   C&AG's Report, para 5.36; Q 4 Back

21   C&AG's Report, Summary, paras 40-41; para 2.16-2.18; Qq 1, 29, 191 Back

22   C&AG's Report, Summary, paras 10-14; paras 3.5-3.10; Qq 32, 159-162 Back

23   C&AG's Report, Summary, para 12; para 3.7; Qq 12-16 Back

24   C&AG's Report, Summary, para 39, para 5.37; Qq 118-121; Audit Commission, Review of the NHS Financial Management and Accounting Regime-A Report to the Secretary of State for Health, July 2006; Department of Health Report, The NHS in England: the Operating Framework for 2007-08, December 2006 Back

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