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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