23 June 2006
Resource accounting and budgeting exaggerated the NHS's net overspend last year by £117m, according to Department of Health finance director Richard Douglas.
But calculations confirmed by the DoH and other sources show that while Rab made last year's overspending look worse, it also disguised similar amounts of overspending over the past five years, as resources were inflated in each of those years through the previous year's underspending.
If the same transparency were afforded for previous years, the NHS would have overspent by between £225m and £395m each year since 2001/02.
A DoH spokesman told Public Finance that Rab 'carry-forward' rules meant that both under- and overspending were carried forward to the next year's revenue allocation.
'The [Rab] carry-forward is simply to reflect levels of over- and under-spending in the previous year,' he says. 'If a [Strategic Health Authority] underspends one year, the funding is added to the amount of resources available to them in the following year. Similarly, if a SHA overspends in one year, it is taken from their funding in the following year.'
The DoH's latest estimate for the 2005/06 net overspend is £512m, compared with £216m for the same NHS organisations in 2004/05. But Richard Douglas argues in his report, NHS financial performance 2005/06, that a fair, 'like-for-like comparison' must take account of the fact that Rab rules meant that the NHS started the year off with £117m deducted from its formal parliamentary revenue allocation, to cover an early estimate of the previous year's overspend.
'On this basis, the in-year deficit is £395m; a deterioration [since 2004/05] of £179m,' argues Douglas.
Commenting on the issue, John Appleby, chief economist at the King's Fund, told PF: 'Unravelling the historical impact of accounting rules such as Rab on the NHS deficit is important in understanding not only the true size of the problem but in providing clues as to how to solve it.'
The implication is that, although the total NHS overspend for 2005/06 was £512m, only £395m of that was mismanaged, 'overtraded' or otherwise spent by NHS trusts: the remaining £117m was never even allocated and went instead to paying off the previous year's debt.
But for the four years before 2005/06, the Rab carry-over rules meant that the NHS's resources were boosted by reported underspends in the previous year.
Click here for estimated underlying overspends 2001-2005 (this will open up a new browser window)
The DoH told PF that 'around £77m' was added to the NHS's allocation for 2004/05 to reflect the previous year's underspend of £73m. The audited overspend for that year was £251m. But that included the extra £77m the NHS received above its formal allocation. If Douglas's calculations for 2005/06 were mirrored for 2004/05, and the 'Rab effect' taken out, overspending against the revenue allocation would be around £328m and the deterioration between 2004/05 and 2005/06 just £67m.
Making the 'Rab effect' clear – and examining NHS spending more transparently against its actual revenue allocation – is exactly what health watchdogs intend to do to future NHS accounts.
'We're aiming to get a truer picture of the underlying position by identifying the Rab effect, brokerage and issues such as capital-to-revenue transfers,' National Audit Office director of health audit Steven Corbishley told PF. 'At the moment, that would be difficult to do because it's not well disclosed in the accounts, but we're hoping that for this year [2005/06] we'll get closer to it.'
Capital-to-revenue transfers – in which funds ring-fenced for capital expenditure are moved over to the revenue account to cover overspends – are hard to ascertain as the DoH does not readily disclose the sums involved.
Analysts at the King's Fund and the NAO approvingly note that such transfers were eliminated from 2004/05 – the year the recent aggregate deficit started to appear in the official accounts – but a parliamentary answer in 2004 stated that transfers for 2003/04 totalled £318m.
If neither those transfers nor a Rab carry-forward of £96m had been available, the final financial position for the NHS against its revenue allocation for 2003/04 would not have been the reported surplus of £73m, but an overspend of £341m.
Official figures for capital-to-revenue transfers for the preceding years are not available but were subject to a formal cap of £250m. A DoH source told PF the full amount was transferred during 2001/02 and 2002/03. If that were the case, NHS spending for those two years was supplemented by an additional £362m and £321m respectively. Had those sums not been available, underspends of £71m and £96m would have been turned into overspends of £291m and £225m.
'These figures are not academic,' Democratic Health Network co-ordinator David Janner-Klausner told PF. 'Knowing how much the NHS actually spends on services is important.
'It is worrying that some trusts can't spend enough to provide care in the current year because covering last year's deficit leaves them with less money. This is not necessarily because of profligacy.'
The DoH has asked the Audit Commission to report on the impact of accountancy rules on NHS finances by the end of the parliamentary session.
PFjun2006
