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A shot in the arm, by Seamus Ward

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07 October 2005

Despite record sums of money being injected into the NHS, trusts are still struggling to balance the books, with deficits running into millions of pounds. So what is going on? Seamus Ward tries to find out

The man on the Clapham omnibus must be scratching his head. The government has promised, and delivered, record funding increases to the health service, yet many trusts are struggling with deficits and cutting services to balance their books. How can the health service receive so much extra cash and fail to live within its means?

In 1999/2000, health authorities and trusts overspent by £129m, according to the National Audit Office. By 2004/05, this had increased to around £237m, Department of Health figures show. The deficit as a proportion of total spending is about the same in both years – between 0.3% and 0.4%.

Although it is a small proportion of the total turnover, the consistency of the figure could lead to the conclusion that the NHS is failing to get to grips with its debt problems.

For many NHS managers the issue is made all the more urgent by the likelihood that the Treasury will revert to more traditional annual health spending increases after 2008. It is thought a root-and-branch review of health service expenditure (announced in July as part of a wider cross-government review) will conclude that the 4.4% to 5.6% spending increase suggested by Derek Wanless in his 2002 report on NHS funding is unnecessary and would have too big an impact on spending in other departments. Instead, managers have assumed for the past 12 months that post-2008 annual spending increases will be closer to the traditional 3% mark.

A British Medical Association survey published at the end of September reported that almost three-quarters of acute and primary care trusts face a shortfall in their funding this year and a third are planning to cut services as a result. The most popular measure is a recruitment freeze, although about a quarter of trusts are considering making staff redundant. Oxfordshire Mental Healthcare trust, for example, is reportedly looking to cut seven consultant posts by March and seven junior doctor posts the following year.

The Department of Health is worried too. NHS England chief executive Sir Nigel Crisp wrote to all the trusts in deficit to remind them of the importance of balancing their books. He warned that there was no easy escape from the debts and that trusts must cut costs.

John Appleby, chief economist in health policy at the King's Fund, says one way of discovering why money seems to be in short supply is to examine how much is already committed before it is allocated to primary care trusts.

As part of the payment by results initiative, the department published tables showing the financial commitments it has made. Although the figures do not show the whole picture – they cover only hospital and community health service spending in England, around 60% of NHS spending – they do offer clues as to why finances are so tight.

In 2003/04, after allowing for extra costs, including the new consultants' contract, the European Union Working Time Directive and investment in new capital, the NHS had an extra 5.2% or £2bn to spend on treating more patients. In 2004/05, this fell to 2.4%, or just over £1bn. The biggest single additional cost was a pension indexation rebasing exercise, which accounted for £1.2bn. Agenda for Change, the new pay system for staff other than doctors and senior managers, cost £490m, while the cost of National Institute for Clinical Excellence guidance on new treatment and equipment rose to £304m from £38m the year before.

Appleby says that more than three-quarters of the £5.1bn cash increase the NHS received for hospital and community health services in 2004/05 was spent covering higher costs and other spending commitments. This proportion remains about the same in the current financial year, with the service holding about £1bn that is not committed. This year, Agenda for Change will cost an extra £460m, pay rises an additional £1.3bn and Nice guidance £328m.

'You can see that the financial inputs into the system have been less in real terms than at first thought,' Appleby says.

He adds that in addition to these extra costs, both trusts and PCTs have to cope with government targets to reduce waiting times. 'I have spoken to a group of finance directors and many of them are wrestling with deficits. They and their fellow managers have to make a trade-off between hitting their targets and their financial balance. Most seem to be coming down on the side of hitting targets.'

A further pressure for finance directors is the department's call to eradicate all historical debt by March 2008 to prepare for the expected lower annual funding increases from the Treasury beyond this date. 'There seems to be a greater urgency in dealing with underlying deficits following the particularly strong message that hospitals need to get stronger financial control,' Appleby says. 'They have 18 months to two years to either earn more money or earn a bit more and start reducing their costs.'

The NHS Confederation puts a slightly different spin on where the money has gone but arrives at roughly the same conclusion. It says the extra cash that has been poured into the service over the past few years has been used to correct years of underfunding – it reckons around 75% of the additional funding in 2004/05 was used to boost historically neglected services.

And it points out that the money has been used to improve services, cut waiting times and build new facilities. Between 1999 and 2004, the NHS recruited 89,000 extra clinical staff. New drugs such as statins, which help reduce heart attacks, are now widely prescribed.

Andy McKeon, managing director of health for the Audit Commission, says the reform programme has increased costs. 'It is also clear that some organisations that have financial problems are finding it increasingly difficult to make the necessary savings to balance the books this year and pay off money borrowed to meet previous years' shortfalls,' he adds.

'Many of the traditional ways of closing the gap, for example by transferring capital to revenue, are no longer possible. However, while there is additional pressure and increased financial risk, the achievement of financial balance is a statutory duty and is not an option. Some NHS bodies need to improve certain aspects of their financial management arrangements to help them plan, cost, forecast and manage these pressures to enable them to attain financial balance.'

McKeon insists last year's deficit is not in itself a problem and points out that most trusts and PCTs balanced their books. But he adds: 'As we and the NAO said in our joint publication Financial management in the NHS 2003/04, what is cause for concern is the number of NHS bodies that are struggling to manage large deficits and the fact that they are increasing in number.'

The biggest single deficit in 2004/05 was held by Surrey and Sussex Healthcare Trust, which reported a debt of £30.6m. The trust is cutting back on its single biggest cost – agency staff – but this means it has to reduce the amount of non-emergency surgery it performs. This, in turn, will affect its income. The trust has estimated that, in the first quarter, this could mean a cut in income of £3.4m or £13.6m for the full year.

It is forecasting a year-end deficit of £68m. However, if it achieves its target of £10m in savings, this should trigger support from its strategic health authority of £17m, cutting the deficit to £41.2m. However, the SHA insists that the deficit should be no higher than £28m by the end of March 2006, leaving the trust to find a further £13.2m in savings. And if the news could not be worse for the trust, these figures do not include the impact of reducing its elective surgery.

Chief executive Gary Walker says: 'The Surrey and Sussex trust is currently working through a financial recovery plan which we are confident will have a positive impact upon our deficit.'

St George's Hospital Trust in London is hoping to break even by the end of the 2006/07 financial year after reporting a deficit of £21.7m at the end of 2004/05. It plans to cut the debt to £12.5m by the end of the current financial year by cutting its workforce by 300. Most of the cuts will come in agency staff, leaving around 70 permanent jobs at risk of redundancy.

Chief executive Peter Homa says most of the cuts will be in non-clinical areas but some clinical staff redundancies will be made possible by reducing the length of time patients spend in hospital. 'This is a difficult time for us, but we need to go through it to get back on financial track. If we put off the tough decisions like this, even tougher decisions will need to be taken in future,' he says.

The recovery plan was due to be completed in 2008 but was brought forward a year at the request of the South West London Strategic Health Authority.

McKeon and Appleby agree that financial pressures will not ease in the short term. McKeon says trusts will face 'major financial, management and governance questions' as they move towards foundation status, while Appleby predicts the roll-out of payment by results will increase financial instability. 'The system deliberately creates financial uncertainty to encourage hospitals to look more deeply at their costs and the quality of the services they provide. If you didn't see any impact in terms of instability, there would be no point in introducing the system,' he adds.

It appears financial problems will remain with the NHS for some time.

A prime example

The sign outside Selby town hall warning visitors that the show inside includes pyrotechnics and loud bangs is apt. Inside, the bombshells being dropped at Selby and York Primary Care Trust's September meeting are about the scale of its financial deficit.

Earlier that month, chief executive Jeremy Clough fell on his sword, explaining he was ultimately accountable for the £6.6m debt run up by the organisation during 2004/05. Two days before the meeting, the PCT took three directors on secondment from neighbouring Craven, Harrogate and Rural District PCT, including acting chief executive Penny Jones and acting finance director Sheenagh Powell.

'My initial assessment is that the PCT spends more on acute care than it can afford to,' Jones says. 'Demand is rising all over the country but it appears to be rising faster here. We will work with the GPs to turn this around.'

Powell is more circumspect. 'It's early days, too early to draw conclusions,' she says. 'There was a series of national pressures that everyone was exposed to but we are trying to understand the underlying causes here. We will prepare for a deliverable financial recovery plan and we will be working with the whole health economy to achieve that.'

Michael Sweet, the PCT's finance committee chair, believes it simply spends too much. 'The PCT spends about £81 per head above the national average in the health service. We serve 300,000 people so that's around £24m a year. There must be potential for savings in that,' he says.

To make matters worse, the trust's external auditor presented a Public Interest Report to the meeting. This was triggered by three factors — the severity of the PCT's deficit, concern over steps that had been taken to improve its financial position and unease over its proposed financial recovery plan.

District auditor Mark Kirkham says the savings plan will be difficult to achieve. The local acute trust, York Hospitals, is already a low-cost provider and savings can be made only by treating more patients in the community. Even with a health authority loan of £13.7m, the PCT is currently forecasting a year-end deficit of £10.3m.

To be fair, this is by no means the worst deficit. And the trust has continued to improve patient services, despite its financial difficulties. It has developed a 24-hour district nursing service, for example, and has helped more than 2,000 smokers to quit.

In 12 months' time, the trust will not exist and will probably be merged with the three other PCTs in north Yorkshire under the government's reorganisation programme. But passing on the debt to this new organisation is not an option. Jones says it is vital the debt is minimised.

'Whatever happens in the next six months, we will leave a legacy for the new organisation. The rest of north Yorkshire is watching with interest.

PFoct2005

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