02 March 2007
NHS watchers turning to the service's third-quarter financial report last week were bemused. Despite Department of Health claims that NHS finances were more transparent than ever, no fewer than three radically divergent bottom-line positions were indicated.
According to the headline figure, the NHS was heading for a small net surplus of £13m by the end of this financial year, reversing the £547m net deficit of 2005/06. But that swing was largely thanks to an extra £450m held in a DoH reserve, Richard Douglas, the department's head of finance and investment, explained in his report.
The only time the NHS will get its hands on that cash will be on March 31, when it is momentarily transferred to strategic health authority balance sheets.
That admission led Douglas to report a second forecast final position of a £437m net deficit – an improvement on last year's overspend of just £110m.
But this, again, does not accurately reflect the financial performance of the NHS, said Douglas, as it ignores the fact that the NHS allocation for the year was docked £698m as part of the DoH's application of the Resource Budgeting and Accounting regime.
This requires that an overspending organisation must make good its deficit by having an equal amount deducted from its following year's allocation.
This year's deduction was substantially higher than last year's overspend as it also adjusted for the previous year, when deductions were lower than they should have been, due to inaccuracies in the early 2004/05 accounts.
Thus Douglas reported a third end-of-year position: 'Looking at the position for just this financial year, by excluding both the reserve and the [Rab] deduction made to resources… both of which are
non-recurrent – the NHS is forecasting that it will deliver an in-year surplus of £269m.'
That in-year surplus is the difference between a deficit of £437m and the £698m Rab deduction to allocation, plus some other minor accountancy adjustments.
In the previous financial year Rab deductions totalled £117m, and so a mirror 'pre-Rab' analysis would reduce the £547m net overspend to an in-year overspend of £430m; implying a £699m swing in the NHS's fortunes between 2005/06 and 2006/07.
But a report by the DoH's chief economist Professor Barry McCormick – published the same day as the third-quarter report – suggests the underlying recovery is even more dramatic than that.
McCormick's report, Explaining NHS deficits, examines the most common hypotheses behind last year's deficit. An unfair allocation formula, unfunded pay rises and unrealistic targets are all dismissed.
Instead, 'the most important explanation of the emergence of deficits [in 2004/05 and 2005/06] is probably the slow adjustment to the accounting change, which disallowed virement from capital to revenue accounts from 2004/05 onwards,' found McCormick.
Providing figures that clarify those first revealed in Public Finance last June, McCormick confirmed that between 2001/02 and 2003/04, an average of £350m was transferred each year from the NHS's capital to revenue accounts. In 2004/05 and 2005/06 – the years the deficit appeared – no such transfer was permitted.
Given that the NHS accounts reported a surplus in each of those three years of no more than £96m, the capital to revenue transfers served to mask revenue overspends of up to £315m.
'Had this scale of virement been allowed in 2004/05, the aggregate deficit would not have been uncovered,' concluded McCormick.
If Douglas's pre-Rab analysis were then repeated for those years – where Rab rules meant underspends were added to the following year's allocations – the NHS is found to have overspent its annual allocation by between £325m and £411m each year from 2001/02 to 2003/04. In 2004/05, the in-year overspend was £328m.
Nigel Edwards, director of policy at the NHS Confederation, told PF: 'McCormick doesn't quite absolve management. He says instead that poor management couldn't cope with the various assaults from various places, but good management could.'
Edwards added that, with the increase in NHS resources since 2001/02, the actual proportion of the £325m–£430m overspend dropped from 0.7% of the total budget in 2001/02 to 0.5% in 2005/06. An in-year surplus of £269m would then buck a historic trend of at least five years.
A recovery of such a scale is not without controversy, however. The £450m central reserve was created at the beginning of the financial year when the DoH devolved responsibility for more than £1bn worth of budgets to SHAs, holding back the £450m as an 'efficiency saving'.
Add to that the £269m in-year underspend and the March 31 accounts could this year mask an underspend across the NHS of £719m: 0.9% of its total budget.
According to Professor Rod Griffiths, president of the Faculty of Public Health, such 'cosmetic short-term fixes' have come at the expense of public health.
'It's obvious the money that was originally allocated to public health initiatives such as obesity, smoking cessation and alcohol abuse has not gone on it. We're still trying to find out what has happened to it,' he told PF.
Most hospital activity statistics are not available until six to 12 months after the fact and so evidence as to whether or not the holding back of £719m from the NHS has indeed led to a deterioration in patient care is hard to come by, as much of the data is not yet available.
But Professor John Appleby, chief economist at the King's Fund, told PF that the latest waiting list figures revealed a small, but clear, reversal of a four-year trend for decreasing waiting times.
'The percentage with the shortest waiting times – 0-13 weeks – has risen steadily from 53.6% in the first quarter of 2003/4 to 75.6% in the third quarter of 2005/6. But since then, it has dropped by over 1% to 74.5% in the second quarter of 2006/07,' he said.
'The percentage change looks small, but it's a definite break in the trend,' he added.
But it might not all be bad news for the NHS. The DoH completed its hat trick of deficit-related reports last week with a response to the Commons health select committee's December report. This had demanded a return of the Rab deductions that had hit debt-ridden trusts with a 'double whammy', requiring them both to address the causes of their overspending and also live within a reduced allocation.
The DoH then agreed the system was unsuitable, but said it could not afford to return the docked funds.
That may change, however, as the department told the MPs last week that it was 'looking seriously at the case for reversing the impact of past Rab deductions for NHS trusts for the delivery of financial balance in 2006/07'.
Indeed, Douglas's report noted the £698m deducted this year was still in the DoH's coffers and would be 'available' next financial year.
If that is the case, a senior source remarked that a fourth bottom line – possibly higher than the £269m surplus – might still be reported in March.
PFmar2007
