Select Committee on Public Accounts Seventeenth Report

4  How are organisations in deficit returning to financial balance?

31. The NHS is going through a transitional period in terms of the way in which healthcare is delivered and the systems used. A number of key policy initiatives are currently being implemented across the NHS. These include Payment by Results, Practice-based Commissioning, NHS Foundation Trusts, and the rationalisation of the Primary Care Trusts and Strategic Health Authorities. These policies have been introduced to improve efficiency and financial performance, but they carry significant financial risk. This risk is reflected by the appointed auditors of local NHS bodies, who reported concerns about financial standing at 348 NHS bodies (excluding Foundation Trusts), or 59%.[30]

32. Although organisations in financial difficulty are expected to return to financial balance within a realistic timetable, the Department aims to be supportive and flexible in working with them. For those organisations with major problems the Department would not insist that the books balanced in 2006-07, giving them more time to recover. As mentioned in paragraph 6, Strategic Health Authorities have also been allowed to build strategic reserves for 2006-07. In 2006-07, most of the funds will be used to assist those with deficits but in future such funds could be put to different uses. The original size of the planned reserves was £350 million, but the Department confirmed that it was looking to create an additional £100 million of reserves to cover the forecast 2006-07 deficit of £94 million.[31]

33. This top-slicing of budgets, which includes all bodies whether in deficit or not, is designed to create a national buffer whereby bodies in deficit can be supported. It is difficult to envisage a situation where all NHS bodies are able to deliver balance or a surplus, and the aim of the reserve is to fund overspending in one location with underspending in another. It does however have the impact of effectively penalising those well-managed bodies that are able to deliver financial balance or a surplus. The Department has given a commitment that Trusts will regain their top sliced funds, but Trusts who are net contributors to the reserves will need to delay spending programmes.[32]

34. For 2004-05, while most bodies with large deficits had a recovery plan, a significant number had not been delivering all elements in practice. Some bodies' financial recovery plans had been successfully designed and delivered, but others had been based on unrealistic assumptions or short-term measures. The Department stated that it had taken action to improve the situation ensuring that it has better oversight of the plans.[33]

35. A key feature of the drive to return to financial balance across the NHS has been the introduction of the turnaround programme. Following a competitive process, the Department contracted external consultants to perform a preliminary assessment of 98 NHS bodies identified as facing particular financial difficulties. In December 2005, these turnaround teams produced preliminary reports on what action could be taken to assist recovery. Since then the organisations have been required to produce recovery plans, assisted by turnaround expertise. The Department's National Programme Office was set up in February 2006 to oversee the turnaround process. The National Programme Office is responsible for ensuring robust plans are developed that are deliverable and for then monitoring their implementation in the organisations concerned. Support is provided from a Turnaround Director appointed for each Strategic Health Authority, who also acts as the interface with the National Programme Office. To date much of the work has been aided by external turnaround expertise. The 98 original turnaround organisations were due to submit their recovery plans to the National Programme Office by mid-June 2006; as at mid-October 2006, 60 such plans had been submitted and approved.[34]

36. The introduction of turnaround support had been particularly effective in improving the standard of financial recovery plans. For example, for the first part of 2006-07, NHS organisations in turnaround were delivering 95% of their cash-releasing cost improvement programmes, compared to a delivery rate of 50-60% eighteen months ago.[35]

37. If turnaround is to be a success, the Department needs to make sure that the lessons identified from turnaround teams are shared with the rest of the NHS in an effective manner. The NPO issue a quarterly newsletter, Strategic Health Authorities facilitate the sharing of information between Finance Directors, and there are arrangements for local organisations to get together to share good practice.[36]

38. The Department agreed that in order to meet the current challenges it was necessary for everyone in an organisation to understand the importance of financial management. Delivering financial balance must not be seen as a task for the finance department alone. There was a need to improve the quality and financial leadership provided by the Board and senior management. The Department are working with the NHS Appointments Commission to improve the financial training given to board members.

39. Clinical engagement in financial matters is key to delivery of financial balance and there is a need to bring more clinicians into senior management positions. Decisions need to take into account both the clinical need and the financial implication, if high quality healthcare is to be delivered most effectively and efficiently. To take such informed decisions, senior management needs to be an effective mix of financial and clinical experience. The introduction of Payment by Results is expected to help increase the financial awareness of clinical and other staff.[37]

30   C&AG's Report, Summary, paras 32-34; paras 5.2, 5.8-5.17, 5.24-5.29; Qq 163-173 Back

31   Qq 22, 56, 63, 180, 182-184; Department of Health, NHS financial performance Quarter 2, 2006-07 Back

32   Qq 22, 33, 56, 58 Back

33   C&AG's Report, paras 3.34-3.35; Q 26  Back

34   C&AG's Report, Summary, paras 35-37; paras 3.52-3.54; Qq 5, 124-126, 194 Back

35   Q 193  Back

36   C&AG's Report, Summary, para 38; para 3.55; Qq 23, 52 Back

37   C&AG's Report, para 3.40-3.51; Qq 54-55, 176, 190, 192, 196 Back

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