Why Labour fears an NHS underspend

12 Oct 00
In politics, appearance is everything. With a general election looming, ministers have their beady eyes trained on the all-important National Health Service.

13 October 2000

Despite years of accumulated deficits, the pressure is on to ensure the NHS appears financially robust. But there is a price to pay.

Public Finance understands that an official snapshot of the service's financial position taken at the end of June, a quarter of the way through the financial year, shows that as a whole the service is on course to break even.

This healthy diagnosis is the result of the £600m that was added to health authorities' general allocations in the chancellor's March budget. With finance directors warning before the Budget that the service was heading for a deficit of more than £500m, the extra resources were timely.

But while breaking even 'in-year' will prevent the health service's financial position from worsening, it will not help to reduce the overall accumulated deficit, which is believed to have stood at about £700m at the end of 1999/2000. Despite earlier indications from Health Secretary Alan Milburn that he wanted to clear 'overhanging debt', it seems that ministers are now happy to live with this historical hangover.

The clear message to trusts and health authorities from the centre is 'to break even in-year, no more and no less'.

The logic is obvious. To eat into accumulated deficits, the service would have to generate a surplus in the current year. But, having announced an 'historic four-year package of funding for the NHS', the government will dread going into the general election with headlines screaming that the health service has underspent. Despite the first-quarter predictions, hitting breakeven will be far from easy.

The nightmare scenario for health service managers is to miss targets, especially the manifesto commitment to cut inpatient waiting lists, and then show an underspend.

But this is emerging as a serious threat. Much of this year's substantial extra funding, over and above the £600m, is ring-fenced for specific initiatives and has only recently been allocated. For instance an extra £150m was announced in May to help the service meet winter pressures this year with a further £62m unveiled in August for intermediate, step-down care. The £150m is ring-fenced for critical care services and the government expects it to pay for an additional 340 beds this Christmas.

Funding is always an issue in meeting steep rises in admissions, as witnessed during last year's flu epidemic. But sourcing staff with the necessary skills is just as much of a problem. If trusts can't find the staff, they can't spend the money. And if we get a repeat of last year's winter problems, elective surgery lists could once again grow while the service concentrates on emergencies. This could leave trusts explaining why they have missed waiting-list targets while still showing a surplus.

Barry Elliott, chairman of the Healthcare Financial Management Association, says the late allocation of some funding and the fact that so much of it is highly targeted will make a breakeven target harder to hit. 'Underspending and missing targets is a real danger,' he said.

The first-quarter projections will not hint at any of these risks. In any year they represent a very early estimate of the financial position. But this year, they may be even more unreliable.

With problems continuing at the Prescription Pricing Authority (PPA) following last year's generic drugs crisis, health authorities are flying blind on primary care prescribing costs, which now come out of their cash-limited budgets. Six months into the financial year, health authorities only have one month's actual prescribing data.

'By quarter one, you'd expect to be showing a breakeven, especially in light of the PPA delays,' says Mark Millar, director of finance and health care commissioning at Suffolk Health Authority. 'But there are a lot of risks in the system. There are expenditure risks and risks around late allocation, including uncertainty around the performance fund. These could cause an undershoot as well as an overshoot.'

But what of the accumulated deficits? There is some light for ministers at the end of the tunnel. From 2000/01 health authorities will have moved to resource accounting, in line with the rest of central government. A by-product is that health authorities will now work within operating financial budgets rather than the traditional cash limits. This will at least mean that the 'technical' deficits introduced by creating provisions for future clinical negligence settlements will disappear downstream. Some say it will make the whole concept of health authority deficits meaningless. But this presentational fix will only ease the problems – it will not solve them.

With an election on the horizon, it may be understandable that ministers do not want to see health bodies reporting surpluses to clear historical deficits. But in today's politically charged climate, and with public expectations for improved services climbing ever higher, it is hard to imagine when there will be a right moment.


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