NHS surpluses: the mystery unravelled

5 Nov 12
Anita Charlesworth

The NHS is under severe financial stress, with some trusts running heavy losses. So how come the health service overall has been notching up billions in surpluses?

The NHS is 18 months into the toughest financial settlement it has ever experienced. Unsurprisingly, Monitor’s quarter-one report shows 25 per cent of foundation trusts in deficit in the first quarter of 2012-13 - and 20 NHS trusts considered financially unviable in their current configuration.

Then last week, the Special Administrator for South London Healthcare NHS Trust published his draft report calling for radical changes to services to stem losses which are being racked up at £1 million a week.

Much of the acute sector is clearly hurting. But the pain is not confined to acute hospitals. In primary care, investment in general practice fell in real terms between 2010-11 and 2011-12.

This picture is very painful but not exactly surprising given the financial outlook.  Against this background, what do you think happened to England’s health budget in 2011-12?

The NHS and the Department of Health run a pretty tight ship financially so overspending is unlikely – on balance you would probably expect health spending in the first year of austerity and the Quality, Innovation, Productivity and Prevention programme to come in pretty much on budget, wouldn’t you?

Well, it didn’t. Spending on the NHS and health as a whole was under budget. The Department of Health recorded an aggregate under-spend of £829 million of revenue and £566 million capital.  Primary care trusts under-spent £527 million of revenue and strategic health authorities under-spent their revenue resource limit by just over £1 billion in 2011-12.

In the NHS this is known as a surplus. It is clearly preferable to a deficit - but is it a good thing for the NHS and health to be delivering surpluses on this scale?

In the private sector surplus is profit and it’s the purpose of businesses. We use the power of competition and regulation to ensure that surpluses are not too great (reflecting abuse of market power) but they are fundamental to our economic model.

In health care, surpluses are different – particularly for commissioners. The government allocated money for health in the Spending Review not so the NHS could deliver surpluses but so that the Department of Health and NHS could use that money to deliver high quality care services to the population.

It is beholden on the NHS to use that money well and deliver value. The NHS needs to eliminate waste, improve productivity and commission services which meet the population's needs. Losing financial control and running up deficits is clearly not compatible with doing the job well. But it does not follow that posting a surplus is a good thing.

In some cases it may be – for example, to fund an investment programme to improve services.  But if health service leaders are serving a population with poor health outcomes and the local health economy is spending below its needs-based allocation, shouldn’t we consider whether a large surplus is in fact a sign of failure not of success?

Surpluses matter because when the health budget as a whole is under-spent the money is no longer routinely carried over into the next.

The Department of Health has to apply to the Treasury for permission to carry over spending under something called the Budget Exchange Scheme . Given the economic and fiscal times we live in the Treasury is not granting much flexibility and carry-overs are limited (£250 million of revenue has been carried over into 2012-13).

In that context we don’t want to return to the ‘typewriters in March’ syndrome where people scrambled around at the end of the financial year for ways to spend – or more accurately waste – money.

But the NHS, Monitor and Department of Health have an approach to financial risk built on surplus – commissioners agree control totals which are below allocation, reducing the amount they can contract with providers and then providers need to plan for their surplus.
Each tier plans for its surplus – perfectly rational if you are the individual organisation’s finance director – but the cumulative impact is that money which was allocated for health is not spent on health.

Perversely, if this continues it may make financial failure more and not less likely, as this under-spending could have been used to invest in the service redesign which is so necessary if the NHS is to cope when the government’s pay freeze ends and years of austerity really start to bite.

Better ways of managing financial risk are a technical, financial and political challenge.
The technical challenge is to make the right calculations for the risk pool so that it covers legitimate unpredictable variation in costs year on year, arising from random changes in demand. This way we move from the usual crude rule-of-thumb top slice.

The financial challenge is to then make available the surpluses from the risk pool, using a more transparent agreed system.

The political challenge is for effective coordination between Monitor and the NHS Commissioning Board as to how risk pools are calculated, the total sum withheld from the NHS, and how the pool is managed.

Anita Charlesworth is chief economist at the Nuffield Trust. This post first appeared on its blog

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