26 January 2007
Who would have thought it? NHS Resource Accounting and Budgeting has suddenly got the media excited. And there's plenty more fancy footwork where that came from. Andy McKeon explains how the Rab story got legs
Recently, something happened that I thought was just impossible. No, it wasn't that an unspectacular middle-aged cricketer oozed sex appeal and won BBC1's Strictly come dancing, or that astronomers managed to photograph the 'dark matter' that makes up most of the universe – although how one photographs something that can't ever be seen is certainly beyond me and my Nikon. It was that a Guardian leader was devoted to NHS accounting practices. It must have sparked many a vibrant conversation over the toast and marmalade – or is my household unique in that respect?
Yes, Resource Accounting and Budgeting had grabbed the headlines yet again. The Department of Health announced that it accepted the logic of the Audit Commission's recommendation that it should give back to NHS trusts the income it had deducted in Rab penalties for overspending. But it also said it couldn't see a way to do it at the moment because of the tightness of the NHS's overall financial position.
This is an understandable position. Significant real resources are involved and it was always going to be difficult to pay back deductions made on account of previous overspends while the NHS is struggling to achieve financial balance. The department said that it would look again at this in the light of the actual outturn for 2006/07. But, while attention has focused on Rab, other financial changes that will have a more fundamental effect on the NHS have slipped by with little or no comment.
The commission's Review of the NHS financial management and accounting regime, carried out for Health Secretary Patricia Hewitt and published last July, was wide-ranging. It proposed far-reaching, and in some cases challenging, changes. Hewitt's response has been similarly all-embracing, confirming her broad agreement with each of the recommendations and establishing a steering group drawn from the department, Treasury, Audit Commission and NHS to oversee implementation.
Two fundamental changes were announced in December's NHS Operating Framework for 2007/08. The first was to establish a formal system of cash loans to replace ad hoc and often opaque 'brokerage'. The second was to move NHS trusts to a financial regime that emphasises cash and liquidity and where funds for capital expenditure are borrowed, rather than allocated. It is the kind of system we are all familiar with and will be a welcome change from one that few could understand or explain.
The first change is important because it will make the financing and financial standing of an institution more transparent. But it isn't a soft touch. Far from it, especially when it is linked to the second change. It will become clear that some trusts – albeit a small minority – will need significant loans to keep paying their bills. But they won't be able to repay the loans over a reasonable period or on reasonable terms. Trusts cannot become insolvent but this will be the nearest thing to it. Radical action will be needed to address their financial and service position. It will be a case of revitalise through management change and action, 'rightsize' and/or subsidise.
We might also see more acquisitions of failing trusts by successful ones, as has just occurred in the West Midlands, where Heartlands NHS Foundation Trust has 'acquired' Good Hope NHS Trust.
The second change will make a trust's financial position easier to understand. It will also make it more business-like – literally – and encourage greater efficiency. It is the kind of financing regime that foundation trusts are familiar with and seem to be making a success of. Recent figures from regulator Monitor suggest that the foundation trust sector is heading for a healthy overall surplus in 2006/07.
But an overall surplus in one part of the system is no good if other parts overspend as a result, which brings me to primary care trusts, the paymasters. The commission's three recommendations here were endorsed by the health secretary. These were: that the department should set the PCT allocations and agree three-year funding objectives with strategic health authorities, during which time the basic financial regime should remain the same; that PCTs should be able to flex their allocations over the three years; and that they should be encouraged to underspend in order to build reserves and make the best use of resources.
The report also noted that organisational accountability would be increased if individual bodies were made more self-standing and less affected by the performance of others. One of the features of the NHS has been the willingness of some organisations to obey instructions to underspend to cover deficits elsewhere, which are often at the other end of the country. Such altruism is what one might expect from a caring institution. And it certainly underscores the 'N' in NHS. But it can also weaken an organisation's sense of responsibility for individual performance as well as undermine local financial partnerships.
Implementing these recommendations successfully and securing the £250m surplus target set for the NHS for 2007/08 won't be easy. First, there needs to be much better medium-term financial planning. This was found to be a notable weakness in PCT financial management in the Auditors' Local Evaluation, part of the Healthcare Commission's 'Annual Health Check'.
Second, there must be close engagement with 'frontline professionals' who actually commit most of the resources in treating and referring patients. Those of you who saw BBC2's Can Gerry Robinson fix the NHS? earlier this month saw how far apart managers and doctors and nurses can sometimes be. There are mechanisms to overcome this, particularly in practice-based commissioning, which is the modern, less bureaucratic and more equitable version of GP fundholding. But they have yet to be properly embedded.
Third, about half the PCTs have only just come into being, following radical restructuring. This means that management appointments haven't been completed and restructuring costs have to be paid even if there are savings later – and they face a daunting agenda.
There is also the problem of finding a way of disengaging from the process of top-slicing PCT allocations, which was used this year to create reserves to offset overspends elsewhere. 2006/07's topslicing will probably achieve its main aim. But it can also be demotivating and strain relationships.
As one PCT finance director put it: 'We made a surplus last year and I planned to spend that with our allocation. Because of the top-slice just prior to the commencement of the financial year, the SHA has required us to give up 3% of our allocation. Additionally, a request was received partway through the financial year asking the PCT to achieve a similar surplus to last year. I am now being criticised by the SHA for not having a detailed £12m cost improvement programme. But, as I said to them, I didn't need one until they came along.' However, like many other exceptional measures that achieve the desired result, getting out is easier than getting in.
Determined leadership and increased professionalism will be needed at all levels of the NHS if it is to get itself on to a firm financial footing. The health secretary committed herself to this in accepting the remainder of the commission's recommendations. The department has been putting its own house in order by giving the NHS all the information it needs to plan for the following year in good time; by learning from its mistakes in setting the tariff for hospital payments under the system known as 'payment by results'; and by committing itself to greater openness and clarity in costing policies.
It is also expecting more from finance staff, taking on board the implications of the findings of the Auditors' Local Evaluation. Manuals of accounts, which give detailed instructions, will become more principle-based and brought into line with UK Generally Accepted Accounting Practice wherever possible. Gone will be the days when finance directors were told precisely how to account for individual items. More financial information will be published more quickly, with training programmes to support development and a clear expectation of high standards all round.
Taken together, the result should be a sea change in NHS finance. I would be pleased to think it will start a trend in other cherished national English institutions, beginning with rugby, cricket and football.
Andy McKeon is managing director, health, at the Audit Commission
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