28 July 2006
The Department of Health should return part of the £504m deducted from the deficit-hit NHS under its application of the Resource Accounting and Budgeting regime, the Audit Commission has said.
The DoH's application of Rab rules to the NHS – in which overspending bodies have their following year's allocations cut by the amount of the previous year's overspend – is 'rather like trying to treat a business as an individual with a credit card bill', said Andy McKeon, the commission's head of health audit.
'But that's just not how businesses operate. They might need to recover that deficit over a number of years, but Rab doesn't allow you to do that.'
In a report ordered by Health Secretary Patricia Hewitt, the commission concluded that the Rab system could create a 'double whammy' effect, because overspending bodies must both address the causes of their initial profligacy and live within reduced means.
A further blow to trusts is that to balance their cumulative accounts – which they are statutorily obliged to do within a three-to-five-year period – they have to make a surplus equivalent to their initial overspend, giving the appearance of having to recoup any overspend twice.
The double-deficit system should be abolished by the end of this financial year at the latest and any deductions repaid, the commission said. Overspending trusts would still have to repay that money, but should be able to do it within their statutory period, and, if necessary, borrow money from a restructured NHS bank to do so.
That would bring hospital trust finance and accountancy regimes closer to those of foundation trusts. The commission's acting chair, Sir Michael Lyons, said this was more appropriate to the needs of the modern NHS market.
'We need to move to a system where all 600 bodies within the health services are able to plan with confidence, and to identify those which are being run well and to act quickly where there are signs of distress or failure,' he said.
Although such a system would put a greater onus on trust management, Nigel Edwards, director of policy at the NHS Confederation, told Public Finance: 'We have a choice between a system that definitely doesn't work and one that's a bit challenging. I know which I'd choose.'
Rab deductions are made to any strategic health authority region with a net overspend. Between the introduction of the policy in 2001/02 and 2004/05, the SHA net overspend was in the region of £504m. That sum would have been deducted by the DoH from the SHAs involved.
DoH finance director Richard Douglas last week told MPs he was preparing to deduct a further £512m this year to cover the overspends of 2005/06.
The commission was not able to determine exactly how much of that money should be given back, as not all SHAs passed the deductions down to their trusts and because NHS accountancy practices 'can be manipulated for reasons of short-term expediency'.
The commission also concluded that Rab deductions to primary care trusts could continue, although with more flexibilities, because PCTs, unlike hospital trusts, did have an obligation to break even at the end of each year.
Instead of managing its overall resources through making Rab deductions to overspenders, the DoH should establish a 'buffer' – by holding back a small percentage of its overall spending – to ensure it did not breach Treasury and Parliament-imposed spending limits.
A DoH spokesman said the department will publish a response later in the year.
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