"The NHS must face up to two uncomfortable truths. There is an upward trend in the number of individual NHS bodies running hefty deficits. And the cumulative deficit for all NHS Trusts at the end of March 2006 had soared to over £1 billion. On these measures, the prognosis for the financial health of the Service is poor.
How can this be when enormous sums of money have been poured into the NHS? Where has all the money gone? There is no one simple answer. But individual bodies in deficit tend to stay in deficit. In some cases, this is because of the rules governing deficit recovery - but in many, I have no doubt, it is due to weak control of finances.
The NHS has also been saddled with a half billion pound bill as a result of errors by the Department of Health in estimating the costs of national pay initiatives, including those for GPs and consultants.
In Shropshire those responsible for financial management of the acute hospital trust, which ran up huge deficits, have been replaced. The new management team seem on track to reduce the deficit substantially this year. But I am concerned that latest Government initiatives may end up shifting financial problems around within the NHS, such as Payment by Results moving the funding problem from acute hospital trusts to primary care trusts.
The transparency of the NHS financial reporting regime must be improved further to prevent deficits being hidden and to make sure the regime is being applied consistently to all bodies. Without this kind of transparency, there can be no spur to improve the standard of financial management in all NHS bodies."
Mr Dunne commented as the Committee published its 17th Report of this Session which, on the basis of evidence from the Department of Health, examined three main issues: what factors had led to the deficits, what the impact was on organisations in deficits, and what steps were being taken to recover deficits.
Spending on the National Health Service is the fastest growing area of public expenditure. The NHS budget for 2004-05 was £69.7 billion, rising to £76.4 billion in 2005-06 and will be £92.6 billion in 2007-08. Despite these increased resources substantially above inflation, the NHS reported an overall deficit of £251 million (including Foundation Trusts) in 2004-05, the first time since 1999-2000 that the NHS as a whole had overspent. In 2005-06, the overall deficit increased to £570 million (£547 million excluding Foundation Trusts). There was an increase in both the number of NHS organisations-Strategic Health Authorities, Primary Care Trusts, NHS Trusts and NHS Foundation Trusts-reporting a deficit (up from 168 to 190) and the proportion of those bodies reporting a deficit (up from 28% to 32%).
The Committee found that there is no single reason why NHS bodies are in deficit, but that a number of factors are at work. Those reporting a deficit tended to have had a deficit the previous year. Excluding foundation trusts, of the 159 bodies reporting a deficit in 2004-05, 117 (74%) also recorded a deficit in 2005-06. The NHS has also been under significant financial pressure to meet the costs of national pay initiatives which the Department had not fully costed. Some NHS bodies have coped better than others in managing these cost pressures, indicating that the standard of financial management expertise varies across the NHS, as does the level of clinical engagement in financial matters. Bodies already in deficit looking to turn their financial position around can also be disadvantaged as they are expected to recover that deficit in the next financial period.
NHS bodies in deficit face the challenge of maintaining and improving the level of healthcare services whilst managing and recovering their deficit, during a period of significant reform and rationalisation within the NHS. To manage their deficits, NHS bodies have needed to cut the size of the workforce, with 903 compulsory redundancies in the six months to 30 September 2006; reduce the number of open hospital wards; and defer significant capital projects. It has also become much more difficult for recently qualified clinical staff to find work in the NHS.
The NHS is aiming to return to financial balance in 2006-07 and to produce a £250 million surplus in the subsequent financial year. In order to achieve balance in 2006-07, the Department has top-sliced the budgets to create a strategic reserve of £450 million as at the end of September 2006.
Bodies with large deficits are required to produce financial recovery plans which are reviewed by the Department. Whilst some plans have been successfully designed and delivered, others have been based on unrealistic assumptions or short-term measures.
A key feature of the strategy to return to financial balance has been the formalisation of the turnaround process and the creation of the National Programme Office to oversee it. It is too early to judge whether the turnaround process will deliver financial balance and offer good value for money. However, there are instances of organisations successfully implementing turnaround plans, whether internally or with the aid of external consultants, and it is important that the lessons learned in these cases are shared with the wider NHS.
