Surplus to requirements, by Sally Gainsbury

11 Oct 07
The NHS has managed to turn a deficit of £547m into a surplus of £510m in one year. Sally Gainsbury looks at the figures behind this success story, and asks how such a financial turnaround could have been achieved in so short a time

12 October 2007

The NHS has managed to turn a deficit of £547m into a surplus of £510m in one year. Sally Gainsbury looks at the figures behind this success story, and asks how such a financial turnaround could have been achieved in so short a time

With terrorism, the weather, and foot and mouth, Prime Minister Gordon Brown is entitled to feel he was dealt a poor hand when he took over in July. But with the NHS he had some good fortune, with the revelation of a £510m surplus for 2006/07, reversing the previous year's net overspend of £547m.

Department of Health finance and investment director Richard Douglas calls the scale of the financial turnaround 'unprecedented'.

Two years of headlines on the NHS financial 'crisis' have given way to less fevered reportage around GP access and the future for private sector involvement.

But, perhaps inevitably, those within the NHS have raised concerns that the financial turnaround came at too high a price, with primary care trusts forced to ration or 'demand manage' treatment; hospitals sacking nurses (or at least freezing recruitment and eliminating agency posts); and the DoH 'raiding' training and public health budgets to help balance the books.

The full size of the turnaround was actually slightly larger than the final reported figures suggested, because Resource Accounting and Budgeting rules required that a record £689m was deducted from the NHS as a whole at the start of 2006/07 to recover previous years' overspends.

Of that, £450m was eventually returned via a controversial 'contingency fund' made up partly of central public health and training funds. By comparing performance against the funds the NHS actually had to spend in 2005/06 and in 2006/07, Douglas found that the in-year turnaround in 2006/07 was £1.2bn.

While provisional accounts suggest that the biggest recoveries were within NHS trusts, Douglas recognised that the bulk of the real in-year turnaround was at PCTs.

They improved their bottom-line positions despite suffering £1.14bn of 'top slicing' by their strategic health authorities, £900m of which appeared as surplus in SHA accounts.

Whether or not any of these cuts have damaged patient care will be revealed next week when the Healthcare Commission publishes the results of its annual health check. If it has, Brown will be cursing his luck again.

But figures seen by Public Finance suggest that, for some organisations at least, a substantial element of their recovery came not from cuts to patient care or even sustainable efficiencies, but from the kind of one-off, short-term accountancy fixes the DoH had promised were a thing of the past.

In annual turnover terms, the biggest recovery was in Western Cheshire PCT. There, the provisional NHS accounts show a move from a £16.3m deficit in 2005/06 to a £4m surplus in 2006/07 a turnaround of £20.3m, representing 6% of its annual turnover.

But monthly finance reports presented to the PCT's board between April 2006 and May 2007 show that it received more than £33m in non-recurrent funds in the financial year 2006/07, all of which have been absorbed into its final income and expenditure account.

That £33m includes a £21m non-repayable support grant from its SHA; £8.5m belonging to a region-wide specialist service hosted by the PCT; and £2.7m compensation impairment funding, which the trust received in error when a building that was up for sale was wrongly deemed to have lost value.

PCT director of finance Iain Crossley tells PF that the £21m SHA support was given on the understanding that the care trust would match that in savings over 2006/07 and 2007/08. Without that support and savings, the PCT was heading for a 2006/07 overspend of £42m, he says.

'We started with a £42m deficit: after we received the SHA's contribution and hit our own savings target, we were still £8.9m adrift, which should have been our deficit,' says Crossley. 'But because we are a host for specialist commissioning and they underspent by around £8.5m, we offset the two to show ourselves in balance.

'But in reality we were overspent, although we were absolutely on our target to recover. We finished the year £4m in surplus, although that wasn't our money to be in surplus with. Around £2.7m of it came from the impairment funding and just over £1m was [regional partnership] drug action team funding.'

Although the SHA support does not have to be repaid, all the other non-recurrent funds will be due this financial year.

The situation at Wandsworth PCT is not dissimilar. It reported a £9m overspend in 2005/06, which was turned into a £13.4m surplus in 2006/07: a £22.4m recovery. At 5.6% of its annual turnover, this was the second largest PCT turnaround in the country.

But Wandsworth's board documents reveal that £11.3m of that came from the net profits made on the sale of land on an old hospital site.

Capital sales are supposed to be credited to an organisation's capital account a principle designed to prevent asset-stripping for short-term gain in revenue accounts. But when an asset is sold for more than the value stated in its balance sheet, the surplus above that 'book value' may be stated as a profit in the revenue account.

Senior accountancy sources told PF that the Audit Commission and DoH frown on such fixes, and that assets surplus to requirements should be revalued prior to their sale to avoid such revenue windfalls.

But a spokesman for Wandsworth told PF that the extra sale price over the stated value was 'due to a successful marketing strategy'. He added that the £11.3m net profit had been fully approved by external auditors.

Financial reports for the third biggest turnaround PCT, Hartlepool, are not available. The fourth largest was the Isle of Wight PCT, which declared that £1.8m or 22% of its £7.9m turnaround was due to an 'accountancy adjustment' and SHA support.

Together, the Isle of Wight, West Cheshire and Wandsworth PCTs reported a £51m recovery between 2005/06 and 2006/07. However, 94% of that £48m was non-recurrent, in the shape of SHA support, accountancy adjustments and asset sales.

Turnarounds at hospital trusts are harder to define, as a significant proportion of their improvement is due to the abolition of the Rab deductions in 2006/07.

In turnover terms, the largest recovery was at Queen Mary's Sidcup NHS Trust. It reported a £19.8m overspend in 2005/06 which it reduced to £1.8m in 2006/07 an £18m turnaround equivalent to 18% of its income.

But Paul Simpson, finance director at Queen Mary's, told PF that although the trust did make 'very real recurrent savings', the actual size of its turnaround was distorted. First, Rab deductions and redundancy contingency funds inflated the size of the 2005/06 overspend (and therefore what had to be 'recovered') by £6m.

Then, £1.2m of the money set aside for redundancies in 2005/06 was not needed and so 'went back in the system in 2006-07'. A further £3m one-off payment also benefited the trust and meant that £10.2m (57%) of the reported turnaround was non-recurrent.

The end to Rab deductions had a similar effect on Surrey and Sussex NHS Trust and South Warwickshire NHS, which experienced the second and third largest recoveries, totalling £41m, of which £22m was non-recurrent.

Simpson defends the efforts of NHS organisations to make sustainable efficiency savings and cost cuts. 'Every organisation will make use of recurrent and non-recurrent items that help it along,' he says. 'But at the core of the NHS recovery are the financial savings that trusts and PCTs have been making over the last year.'

Whether that is good news or not should be revealed shortly.


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