Bringing clarity to NHS finances

15 Jul 99
In the normal world, a deficit is a deficit. But, in the world of NHS finance, such simple rules do not apply.

16 July 1999

Deficits can be in-year, underlying or cumulative. To complicate things further, some aren't even real, they are 'technical'. But, thanks to changes in finance rules, understanding NHS trust accounts is about to become a lot easier.

Technical deficits arise when funds are set aside in anticipation of a later payout, for example, to cover the early retirement of a trust employee. These days, it is equally likely to be for clinical negligence. For instance, if an operation goes wrong, a trust may estimate it will have to pay out £1m to the claimant in due course.

Under the old guidance, the trust was required to enter this provision in its books, which would show up as an income and expenditure deficit of £1m. The trust could have immediately reflected the cost of this provision in its prices to health authorities, eliminating the deficit in the same year as the provision was made.

But there are two disadvantages to this. First, the final settlement, some five or six years down the line, could be for a different amount. Secondly, and more importantly, it would involve money being transferred across from health authorities' cash-limited annual budgets to lie idle with the trust for the years until settlement.

Instead, the approach has been to adjust prices in the year that the settlement is made. The disadvantage of this is that in the time between the incident taking place and settlement, the trust carries the deficit with it.

An added complication has been NHS trusts' statutory duty to break even over three years. That duty, along with the watching media, makes little allowance for technical deficits. So trusts are left trying to eliminate these deficits in the short term, even though the price increases to cover the provision will only be levied several years down the line.

This could have extreme consequences, according to Colin Reeves, the NHS Executive's director of finance and performance. 'A trust could close a ward to cover its deficit in the knowledge that in two or three years' time it will have the cash to cover the provision,' he says.

Under the new system, deficit provisions will disappear from trust books. Instead, they will be picked up by health authorities. What probably focused government minds on the problem was that the first three-year period of trusts' statutory duty ends next March. Leaving the system unchanged would not only have left trusts making inappropriate decisions to eliminate technical deficits, it could also have led to a situation where trusts were deemed by auditors to have failed to meet a key statutory duty.

In 1999/2000, the service as a whole is planning to show a deficit of approximately £93m. Trusts account for nearly £60m of this, while health authorities' net deficit makes up the balance. These figures take into account deficit provisions of some £130m, with about £100m of that currently sitting in trust books.

Under the new guidance, this £100m will transfer across, leaving trusts en masse £41m in surplus and health authorities £134m in deficit. Importantly, these arrangements are being backdated to April 1994.

The NHS cumulative deficit, which is on course to exceed £600m by April 2000, will not change, but the split between trusts and health authorities will send the former into the black, while health authorities will show a net cumulative deficit of some £1.1bn.

Reeves insists this is not a smoke and mirrors trick. While the rule change might prevent trusts from failing their statutory duty for technical reasons, the increasing net liability position of the NHS still has to be tackled.

Health authorities have no statutory duty to break even, though they must stay within their cash limit. They handle their deficits principally through a system of cash brokerage or by delaying payments to creditors, mainly trusts, and so extending their liability position. If the government's targets for public sector payment are to be met, the NHS will have to stem its increasing liabilities.

As part of the changes, Reeves wants to see a closer relationship between the long-term liabilities in the books of NHS organisations and the cash allocation process. A principal benefit is that health authorities locally and the NHS Executive nationally would be able to take account of when provisions are paid for within resource allocation plans. As Reeves admits, this does not eliminate the problem and the real aim must be to reduce clinical negligence claims.

The move is being welcomed by trust finance directors. 'It makes understanding the NHS financial position much clearer,' says Bob Dredge, director of finance at the Royal Wolverhampton Hospitals NHS Trust.

But it also means that, in future, trusts that run up deficits will not be able to hide behind excuses that the problems exist only in some technical fantasy land.

As Dredge points out: 'As we get more and more best practice and more consistency between health bodies, there will be fewer and fewer places to hide.'


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