Financial Management in the NHS

Transcription

1 Fiacial Maagemet i the NHS NHS (Eglad) Summarised Accouts REPORT BY THE COMPTROLLER AND AUDITOR GENERAL PREPARED JOINTLY BY THE NATIONAL AUDIT OFFICE AND THE AUDIT COMMISSION HC 1092-I Sessio Jue 2006

2 The Natioal Audit Office scrutiises public spedig o behalf of Parliamet. The Comptroller ad Auditor Geeral, Sir Joh Bour, is a Officer of the House of Commos. He is the head of the Natioal Audit Office, which employs some 800 staff. He, ad the Natioal Audit Office, are totally idepedet of Govermet. He certifies the accouts of all Govermet departmets ad a wide rage of other public sector bodies; ad he has statutory authority to report to Parliamet o the ecoomy, efficiecy ad effectiveess with which departmets ad other bodies have used their resources. Our work saves the taxpayer millios of pouds every year. At least 8 for every 1 spet ruig the Office. The Audit Commissio is a idepedet body resposible for esurig that public moey is spet ecoomically, efficietly ad effectively, to achieve high-quality local services for the public. Our remit covers aroud 11,000 bodies i Eglad, which betwee them sped more tha 180 billio of public moey each year. Our work covers local govermet, health, housig, commuity safety ad fire ad rescue services. As a idepedet watchdog, we provide importat iformatio o the quality of public services. As a drivig force for improvemet i those services, we provide practical recommedatios ad spread best practice. As a idepedet auditor, we esure that public services are good value for moey ad that public moey is properly spet.

3 Fiacial Maagemet i the NHS NHS (Eglad) Summarised Accouts This volume has bee published alogside a secod volume comprisig the Accouts HC 1092-II NHS (Eglad) Summarised Accouts LONDON: The Statioery Office Ordered by the House of Commos to be prited o 7 Jue 2006 REPORT BY THE COMPTROLLER AND AUDITOR GENERAL PREPARED JOINTLY BY THE NATIONAL AUDIT OFFICE AND THE AUDIT COMMISSION HC 1092-I Sessio Jue 2006

4 This report has bee prepared for presetatio to the Houses of Parliamet uder Sectio 98(4) of the Natioal Health Service Act Joh Bour Comptroller ad Auditor Geeral Natioal Audit Office 6 Jue 2006 The Natioal Audit Office study team cosisted of: Frazer Clark ad Rachel Taylor, with assistace from Joe Aderso, Sara Hesketh ad Rebecca Lych, uder the directio of Steve Corbishley The Audit Commissio study team cosisted of: Emma Kowles, with assistace from Rajesh Kisha ad Claire Johsto, uder the directio of Ady McKeo This report ca be foud o the Natioal Audit Office website at ad the Audit Commissio website at For further iformatio about the Natioal Audit Office please cotact: Natioal Audit Office Press Office Buckigham Palace Road Victoria Lodo SW1W 9SP Tel: equiries@ao.gsi.gov.uk cotets summary 1 Part 1 Itroductio 12 What this report is about 13 Structure ad fudig of the 13 Natioal Health Service Part 2 Fiacial performace i Fiacial duties ad targets 17 Aggregate performace of the NHS 18 Deficits ad surpluses by type of NHS orgaisatio 18 Fiacial support 20 Results of idividual NHS bodies 22 Performace of Strategic Health Authority areas 24 For further iformatio about the Audit Commisio please cotact: Audit Commissio 1st Floor Millbak Tower Millbak Lodo SW1P 4HQ Tel: ac-equiries@audit-commissio.gov.uk Natioal Audit Office ad Audit Commissio 2006

5 Part 3 Returig to fiacial balace 28 Backgroud to deficits i the NHS 29 Why does a deficit matter? 33 Causes of deficits 34 Fiacial recovery plas 35 Service recofiguratio ad efficiecy savigs 38 Role of Boards ad maagemet reportig 40 Orgaisatio-wide approach to fiacial balace 41 Curret developmets 43 Part 5 Fiacial issues arisig i ad beyod Fiacial stadig 63 Paymet by Results 65 Practice-based commissioig 65 Earlier preparatio of accouts ( Faster Closure ) 66 Mergers ad the impact of redudacy ad 68 severace paymets Auditors Local Evaluatio 70 The way forward 71 Part 4 Audit of the NHS accouts 44 Audit reportig 45 Corporate Goverace 48 Fiacial maagemet issues arisig 50 durig aexes 1 Fiacial performace of the NHS 72 by orgaisatio type 2 Fiacial duties of NHS orgaisatios 74 3 NHS bodies with overspeds or qualified 76 regularity opiios i The NHS Bak 80 5 Auditors Local Evaluatio: Key Lies of Equiry 82 6 Glossary of terms used i the report 83 Photographs courtesy of Alamy.com, Justie Desmod Photography ad Docaster ad Bassetlaw Hospitals NHS Foudatio Trust. The Trust is committed to providig local, sustaiable, excellet services. I additio to the bodies specifically amed i the report, the Natioal Audit Office ad the Audit Commissio would like to thak the followig orgaisatios for their assistace: Dorset Healthcare NHS Trust, East Ket Hospitals NHS Trust, Nuffield Orthopaedic Cetre NHS Trust, West Sussex Health ad Social Care NHS Trust ad Worthig ad Southlads Hospitals NHS Trust.

6 summary summary

7 summary Joit report by the Natioal Audit Office ad the Audit Commissio This report was prepared joitly by the Natioal Audit Office ad the Audit Commissio. It icorporates: the fidigs of the Natioal Audit Office from their audit work o the NHS summarised accouts, the cosolidated accout of NHS Foudatio Trusts, the Departmet of Health s resource accout ad other statutory health orgaisatios with a atioal remit; the fidigs from the Audit Commissio s appoited auditors work o the accouts of idividual NHS orgaisatios; ad the uaudited NHS reveue out-tur for as reported by the Departmet of Health ad Moitor, with brief aalysis ad commetary by the Natioal Audit Office ad the Audit Commissio. Through this joit perspective, the report examies the fiacial issues facig idividual NHS orgaisatios ow ad i the future. It presets a overview of the effects of these issues at atioal level ad examies the cosequeces for the atioal health ecoomy. 1 Fiacial maagemet i the NHS is a report prepared joitly by the Natioal Audit Office ad the Audit Commissio. It looks i detail at the reveue positio, examies curret fiacial maagemet ad reportig issues, ad cosiders the most sigificat fiacial issues facig the NHS i ad beyod, as well as the Departmet ad Moitor's uaudited estimates of the fiacial positio. It is a followup to our joit report issued i Jue 2005, 1 ad may of the recommedatios made remai valid to the NHS i that report. The Departmet of Health has respoded to our recommedatios by improvig the trasparecy of the NHS accouts, but the level of implemetatio of the recommedatios by idividual NHS bodies will oly become clear oce auditors have completed their Auditors Local Evaluatio assessmet. 2 I the NHS i Eglad spet a total of 69.7 billio. Over the period of the five-year settlemet aouced i the 2002 Budget ( to ), expediture i the NHS is risig at a average of 7.3 per cet per aum i real terms, brigig total aual expediture to 76.4 billio i ad reachig 92.6 billio by Healthcare therefore remais the fastest growig area of public expediture. 1 Fiacial Maagemet i the NHS NHS (Eglad) Summarised Accouts , HC 60-I, 24 Jue Fiacial Maagemet i the NHS 1

8 summary 3 Icreased spedig o the NHS has bee accompaied by a challegig set of service ad performace targets, coverig waitig times, access ad health outcomes. These iclude reducig maximum ipatiet waitig times to six moths by the ed of 2005, ad maximum waitig times for a first outpatiet appoitmet to three moths (13 weeks) by the ed of Alogside service improvemets, the Govermet gave a commitmet i the NHS Pla 2 to improve the pay ad coditios of NHS staff, ad 30 per cet of the 6.7 billio fudig icrease i has bee directed towards this. Summary of fiacial performace i I , the Departmet reported a deficit across the NHS as a whole the first time sice that the NHS has failed to break eve overall. Compared to , there was a icrease i the umber of bodies with a deficit or oversped, ad more of these deficits ad overspeds were sigificat i size (Figures 1 ad 2). The icrease i deficits ca be attributed to a combiatio of: steady progress i recet years towards more trasparet NHS fiacial reportig; ad some deterioratio i uderlyig performace. However, quatifyig the role played by each is difficult. 1 Percetage of NHS bodies with a deficit or oversped Percetage of NHS bodies with a deficit or oversped > 0.5% of icome The proportio of NHS bodies with a deficit or oversped is icreasig Source: Natioal Audit Office aalysis of NHS summarised accout data/accouts of idividual NHS bodies icludig Foudatio Trusts The proportio of NHS bodies with a sigificat deficit or oversped is icreasig Source: Natioal Audit Office aalysis of NHS summarised accout data/accouts of idividual NHS bodies icludig Foudatio Trusts 2 Departmet of Health, The NHS Pla, A Pla for Ivestmet, A Pla for Reform (2000). 2 Fiacial Maagemet i the NHS

9 summary 5 I summary: The aggregate oversped for all NHS bodies (icludig Foudatio Trusts) was millio (0.38 per cet of total reveue expediture) compared with a udersped of 65.4 millio (0.10 per cet) i (Figure 3 overleaf); 171 NHS bodies (icludig Foudatio Trusts) out of 615 (28 per cet) recorded a deficit or oversped i , compared with 106 out of 600 (18 per cet) i out of 259 NHS Trusts (26 per cet) failed to break eve i out of 303 Primary Care Trusts (30 per cet) failed to keep expediture withi reveue resource limits. Oe Strategic Health Authority failed to keep expediture withi its reveue resource limit. NHS Foudatio Trusts are subject to the compliace regime of the Idepedet Regulator of NHS Foudatio Trusts ( Moitor ). They have a differet accoutig, fudig ad accoutability framework from other NHS bodies ad do ot have a statutory break-eve duty (Aex 2). Withi this framework, 12 NHS Foudatio Trusts recorded a deficit i A icreasig umber of NHS bodies icurred i-year deficits. The umber of sigificat i-year deficits (of over 0.5 per cet of icome or available reveue resources) icreased to 23 per cet from 13 per cet i Primary Care Trusts had reveue resource limit overspeds of over 5 millio, compared to five 5 i NHS Trusts reported a deficit of over 5 millio i , compared to 12 i Four out of 25 NHS Foudatio Trusts (three after adjustig for impairmets) reported a deficit of over 5 millio i , their first year of operatio. The umber ad size of sigificat deficits amogst NHS Trusts, Primary Care Trusts ad Strategic Health Authorities would have bee greater without specific fiacial support either from withi the local health ecoomy or cetrally. However, the fiacial support available to local bodies has reduced from previous years, sice Strategic Health Authorities retaied more of their surpluses rather tha distributig them to help elimiate deficits (Aex 1). I additio to i-year deficits, a umber of NHS Trusts also have sigificat cumulative deficits. These deficits will eed to be recovered if Trusts are to fulfil their statutory break-eve duty ad, ultimately, meet the criteria for achievig Foudatio status. The total cumulative deficit across NHS Trusts as at 31 March 2005 was 598 millio ( : 276 millio). 6 Strategic Health Authorities have a target of deliverig fiacial balace i aggregate across the NHS bodies withi their area (except for NHS Foudatio Trusts, which are regulated separately by Moitor). 16 out of 28 Strategic Health Authority areas icurred a aggregate oversped i , compared with seve i ad six i (Figure 4 o page 5). Strategic Health Authorities are ot resposible for performace-maagig NHS Foudatio Trusts, ad hece Foudatio Trusts results are excluded from this aalysis (see also Aex 1). Returig to fiacial balace 7 The millio aggregate deficit across the NHS i was relatively small i the cotext of 66.3 billio of reveue expediture (0.38 per cet), ad ideed 72 per cet of NHS bodies achieved break-eve or a surplus i However, almost a quarter of NHS bodies reported a deficit greater tha 0.5 per cet of icome. Where a orgaisatio has overspet by a large amout, restorig a fiacially balaced positio ca have a impact o service delivery. 3 The udersped figure reflects a prior-year adjustmet made to the out-tur of Kesigto ad Chelsea Primary Care Trust i The effect of this adjustmet was to icrease the Primary Care Trust deficit by 7.1 millio, ad hece reduce the overall NHS udersped by the same amout. The Departmet was ot required to adjust for this i the NHS summarised accouts sice the sum is ot material by value i the cotext of those accouts. It therefore recogised the 7.1 millio of expediture i rather tha adjustig the figure for Thus the overall NHS deficit reported i the summarised accouts ad cosolidated accouts of NHS Foudatio Trusts is millio ( millio for the summarised accouts ad 36.9 millio for Foudatio Trusts), with a surplus of 72.5 millio for However, for the purposes of this report we have adjusted the figures to esure that the actual local positio is accurately reflected i the detailed aalysis. 4 Dacorum Primary Care Trust was required to make a prior-period adjustmet to its accouts i , reclassifyig 1.2 millio of expediture to ad therefore icreasig its oversped from 4.8 millio to 6.0 millio. The Departmet were ot required to adjust for this figure i the NHS summarised accouts sice it is ot material by value. Hece the Departmet s summarised accout figures show the umber of Primary Care Trusts with overspeds greater tha 5 millio as 27 rather tha This figure has bee adjusted from four to five to reflect the prior-year adjustmet made at Kesigto ad Chelsea Primary Care Trust, which icreased its deficit from 1.2 millio to 8.3 millio. Fiacial Maagemet i the NHS

10 summary 3 Performace ad aggregate outtur of NHS bodies i Type of NHS body Number of bodies Number with Number reportig Aggregate Aggregate Net total i existece break-eve/ a deficit/ surplus/ deficit/ for year surplus oversped udersped oversped or part of year i i millio millio millio Strategic Health Authorities (0.4) Primary Care Trusts (335.1) (265.3) NHS Trusts (382.7) (321.7) NHS Foudatio Trusts (40.8) (36.9) 2 Total (759.0) (251.2) Source: Audited summarisatio data/accouts of idividual NHS bodies NOTES 1 Te NHS Foudatio Trusts were i operatio for the full year ad 15 NHS Trusts became NHS Foudatio Trusts partway through The performace of these 15 prior to this chage is icluded withi NHS Trusts, ad their subsequet performace withi NHS Foudatio Trusts. Thus the total umber of bodies at ay give time was Foudatio Trusts aggregate deficit is 29 millio after adjustig for the impact of impairmets. 8 The reasos for the fiacial difficulties of NHS bodies are complex, ad caot be attributed solely to poor fiacial maagemet, although this ca be a cotributig factor. A umber of NHS bodies reported to us that they experieced cost pressures arisig from atioal iitiatives such as the implemetatio of the ew Ageda for Chage pay system, the cosultat cotract, the ew Geeral Medical Services (GMS) cotract ad the eed to meet performace targets for access ad service provisio. All orgaisatios have faced cost pressures, but some have bee able to maage these better tha others. 9 Orgaisatios that have sigificat deficits are also likely to be short of cash, which will affect their ability to meet their fiacial commitmets. I , a small umber of NHS bodies cosidered deferrig paymet of tax ad social security costs to HM Reveue & Customs, with a hadful eve strugglig to pay staff wages. For those orgaisatios with the most serious fiacial problems, dealig with fiacial pressures ad the resultat corporate distress diverts resources ad maagemet attetio away from ormal operatioal ad strategic priorities. 10 The Departmet applies the cross-govermet Resource Accoutig ad Budgetig (RAB) framework to the NHS, which meas that the fudig ad accoutability relatioship betwee HM Treasury ad the Departmet is effectively mirrored i the Departmet s relatioship with the Strategic Health Authorities. Uder the RAB framework, orgaisatios that icur a over or udersped i a give year carry it forward ito the followig year. This meas that if a orgaisatio cosumes a millio pouds more tha its available resources i a give year, the resources available for it to sped the followig year are reduced by the same amout. Equally, a orgaisatio which uderspeds has a icreased level of resources available to it i the followig year. 11 RAB operates o the priciple that, if oe part of the system overspeds withi a fixed resource limit, the aother must udersped by a equal amout to avoid that resource limit beig breached. This meas that fidig the resources to cover deficits icurred withi the NHS will ievitably have a impact somewhere i the system. The alteratives to idividual bodies repayig their ow deficits through RAB resource reductios are either that the Departmet withholds resources to cover the deficit cetrally, 6 or that NHS bodies with a surplus lose uspet resources rather tha carryig them forward. As the Departmet allows uderspedig NHS bodies to keep resources that they have ot cosumed, it requires overspedig bodies to reduce their costs ad repay the oversped themselves. 6 For , the Departmet has aouced that it will require Primary Care Trusts to lodge reserves with Strategic Health Authorities, who will be expected to deliver overall balace across their regio. This will effectively allow Strategic Health Authorities to absorb the effect of the RAB regime ad allow time to achieve fiacial recovery. Fiacial Maagemet i the NHS

11 summary 4 Strategic Health Authority areas with a aggregate oversped South West Peisula 2 Avo, Gloucestershire ad Wiltshire 3 Hampshire ad Isle of Wight 4 Surrey ad Sussex 5 North West Lodo 6 Ket ad Medway 7 Norfolk, Suffolk ad Cambridgeshire 8 South West Lodo 9 South East Lodo 10 Essex 11 Bedfordshire ad Hertfordshire 12 Thames Valley 13 West Midlads South 14 Leicestershire, Northamptoshire ad Rutlad 15 Shropshire ad Staffordshire 16 North ad East Yorkshire ad Norther Licolshire 1 South West Peisula 2 Avo, Gloucestershire ad Wiltshire 3 Hampshire ad Isle of Wight 4 Surrey ad Sussex 5 North West Lodo 6 Ket ad Medway 7 Norfolk, Suffolk ad Cambridgeshire 1 South West Peisula 2 Avo, Gloucestershire ad Wiltshire 3 Hampshire ad Isle of Wight 4 Ket ad Medway 5 Greater Machester 6 Cumbria ad Lacashire Source: Natioal Audit Office 4 Fiacial Maagemet i the NHS 5

12 summary 12 Whilst the priciples of this system are cosistet with the fiacial duties of the NHS ad the Departmet, we are cocered that Strategic Health Authorities have applied the regime differetly across the coutry. This has led to ucertaity withi the NHS about the fairess ad cosistecy of the RAB system as applied to local bodies. A more cosistet applicatio of the carry-forward regime to local bodies would promote greater uderstadig of the system withi the NHS, ad icrease comparability betwee local bodies performace. However, there is a iheret tesio betwee applyig the system rigidly ad uiversally, ad allowig Strategic Health Authorities to maage regioal health ecoomies accordig to local circumstaces. These issues will be examied i more detail as part of the Audit Commissio s forthcomig review of the NHS fiacial maagemet ad accoutig regime (paragraph 39). 13 Notwithstadig the tesio betwee cosistet applicatio ad flexible maagemet of the local positio, more trasparecy is required i bodies accouts to show the effect of RAB carry-forward adjustmets, ad the extet to which these have bee applied i idividual cases. 14 NHS Trusts face a additioal challege, sice their i-year surplus or deficit ot oly affects their icome the followig year, it is also carried forward to give a cumulative positio, which is used to assess whether the Trust has fulfilled its statutory break-eve duty (Aex 2). NHS Trusts therefore still have to break-eve takig oe year with aother, but with reduced icome. This is kow i the NHS as a double deficit. NHS Trusts have expressed cocer that oce fiacial balace has bee lost, the resultat cut i icome makes recovery ad achievemet of the statutory duty doubly difficult. Primary Care Trusts ad Strategic Health Authorities are subject to a differet fiacial regime. Although their icome is similarly reduced the year after a deficit has bee icurred, there is o break-eve duty ad therefore o double deficit. I , NHS Foudatio Trusts which reported a deficit i their last period as a NHS Trust did ot have their icome reduced as a result, ad those which eded the year i surplus did ot have their icome icreased i the followig year. 15 A umber of NHS Trusts have sigificat cumulative deficits, ad will face cosiderable challeges to recover them. Clearig these deficits will require resources to be foud from somewhere withi the NHS, ad hece if the bodies themselves do ot repay them, other fuds will have to be diverted away from their iteded recipiets. The Departmet therefore believes that these cumulative deficits should ot be writte off, sice this would provide o icetive for orgaisatios to retur to fiacial balace ad avoid deficits i future. They also believe it would ot be fair to take resources from oe part of the NHS to support overspedig orgaisatios i aother. 16 The Departmet should cosider the log-term implicatios of this stace. For a miority of bodies, it will ot be feasible to recover their cumulative deficits without some form of fiacial assistace from the Departmet. From , the Departmet plas to replace the brokerage system for NHS Trusts with a system of loas ad deposits, ad this will eable those orgaisatios with sigificat cumulative deficits to remai solvet. However, the ability to demostrate a fiacially sustaiable positio withi three years is a key criterio for achievig NHS Foudatio Trust status. If the Departmet iteds ot to clear Trusts historic debt usig resources from elsewhere i the system, it will eed to cosider how these orgaisatios will reach the stadard required to achieve Foudatio Trust status. The Departmet should also cosider formulatig a detailed failure regime for NHS Trusts whose levels of debt mea they are o loger viable etities. 17 I health bodies where fiacial stadig is a cause for cocer, fiacial recovery plas are essetial. NHS bodies with sigificat deficits eed to cosider redesigig or recofigurig the provisio of services to achieve recurret fiacial balace. Evidece suggests that this oly teds to occur where a robust recovery pla has bee produced which uderpis the redesig process ad is fully itegrated with other service ad fiacial plas. 18 Part 3 cosiders what is meat by deficits i the NHS fiace regime, explores the circumstaces i which NHS bodies fall ito fiacial difficulties ad examies the ways i which some NHS bodies have retured to fiacial balace. NHS Foudatio Trusts 19 NHS Foudatio Trusts operate uder a differet legal framework from the rest of the NHS. They are autoomous orgaisatios, public beefit corporatios, which caot be directed by the Secretary of State. They are ot subject to the performace-maagemet regime of the Strategic Health Authorities, ad do ot have the same fiacial duties ad targets as NHS Trusts. The Board of Directors of a NHS Foudatio Trust is accoutable to its Board of Goverors ad to Parliamet for its performace. Moitor, the Idepedet Regulator of NHS Foudatio Trusts, oversees the Foudatio Trust sector ad scrutiises how NHS Foudatio Trusts are meetig their obligatios, for example to meet atioal healthcare targets ad stadards ad to operate effectively, efficietly ad ecoomically. 6 Fiacial Maagemet i the NHS

13 summary 20 As part of the applicatio process, aspirig NHS Foudatio Trusts are subject to a robust assessmet of their fiaces ad must demostrate that they are fiacially viable ad have the maagemet capacity ad capability to operate i the ew regime. I retur, they have sigificatly more freedoms, icludig the ability to raise capital from both private ad public sectors ad to retai operatig surpluses for ivestmet i services to be delivered i the future. They are also free from the statutory duty to break-eve, ad therefore reportig a deficit does ot impact o their future icome i the way it does for NHS Trusts. However, they must adhere to the coditios set out i their Terms of Authorisatio ad Moitor s compliace regime. This meas that all NHS Foudatio Trusts are moitored agaist achievemet of their fiacial plas ad if there is a deterioratio of performace which causes a fall i fiacial risk ratigs, Moitor itesifies its moitorig of the orgaisatio cocered. Moitor has powers to itervee i the ruig of a NHS Foudatio Trust where a deterioratio i performace amouts to a sigificat breach of its Terms of Authorisatio. NHS Foudatio Trusts ca pla to icur a deficit. However, i ot all the deficits icurred were plaed for, ad four i particular were sigificatly larger tha expected. Audit of the Accouts 21 As i , the appoited auditors of idividual NHS bodies did ot qualify their opiio o the truth ad fairess of the accouts of ay Strategic Health Authority, Primary Care Trust or NHS Trust. The Comptroller ad Auditor Geeral was therefore able to give a uqualified opiio o the truth ad fairess of the summarised accouts for these bodies. 22 The auditors of idividual NHS Foudatio Trusts did ot qualify their opiio o the truth ad fairess of ay of these accouts, ad the Comptroller ad Auditor Geeral gave a uqualified opiio o the truth ad fairess of the cosolidated accout of NHS Foudatio Trusts. 23 The appoited auditors gave qualified opiios o the regularity of expediture at oe Strategic Health Authority because of a breach of resource limits. They gave qualified opiios o the regularity of expediture at 92 Primary Care Trusts because of 91 breaches of resource limits ad six istaces of other irregular expediture (five of these six were qualified both for resource limit breaches ad for icurrig other irregular expediture). 24 Appoited auditors reported a disappoitig reductio i the quality of accouts submitted for audit. The most worryig aspect was the size of the movemet betwee the uaudited ad audited accouts, which i icreased the overall deficit across the NHS (icludig NHS Foudatio Trusts) by millio, from millio to millio. 25 The three most sigificat causes for this were prescribig expediture, Ageda for Chage ad adjustmets to service level agreemets. Auditors reported evidece of iappropriate adjustmets or omissios i 125 bodies accouts (21 per cet) i At a idividual body level, ot recogisig the true fiacial positio may mea that bodies fail to take the ecessary corrective actio. At Strategic Health Authority ad atioal level it makes maagig the positio more difficult. 26 The fiacial performace of NHS orgaisatios is reported i more detail i Part 2, ad the fidigs of the appoited auditors are reported i more detail i Part 4. Fiacial issues arisig i ad beyod 27 There were a sigificat umber of fiacial maagemet issues that NHS bodies faced for the first time i Achievig fiacial balace remaied a challege for a sigificat umber of NHS bodies i , with auditors reportig cocers about fiacial stadig at 59 per cet of NHS bodies (excludig NHS Foudatio Trusts). Uaudited year-ed figures suggest that the deficit for is i the regio of 536 millio ( 512 millio excludig NHS Foudatio Trusts), ad that 31 per cet of NHS bodies (icludig Foudatio Trusts) are predictig a deficit, compared to 28 per cet i As Figure 5 overleaf shows, 17 Strategic Health Authority areas (excludig NHS Foudatio Trusts) are predictig a overall deficit, 15 i excess of 10 millio. I Part 4 we highlight our cocers about the shift observed i betwee NHS bodies uaudited ad audited out-tur, ad hece these figures should be treated with cautio. 29 Uaudited year-ed figures provided by Moitor predict a deficit of 24.4 millio across the Foudatio Trust sector, cosistig of a gross surplus of 29.6 millio ad a gross deficit of 54.0 millio. This represets a Fiacial Maagemet i the NHS 7

14 summary 5 Strategic Health Authority areas predictig a oversped i uaudited year-ed out-tur Oversped > 10m Areas with oversped > 10 millio 1 Cheshire ad Merseyside 2 Shropshire ad Staffordshire 3 West Midlads South 4 Avo, Gloucestershire ad Wiltshire 5 South West Peisula 6 Hampshire ad Isle of Wight 7 Thames Valley 8 Surrey ad Sussex 9 South West Lodo 10 South East Lodo 11 North West Lodo 12 Bedfordshire ad Hertfordshire 13 Leicestershire, Northamptoshire ad Rutlad 14 Norfolk, Suffolk ad Cambridgeshire 15 North ad East Yorkshire ad Norther Licolshire Areas with oversped of 10 millio or less 16 Essex 17 Ket ad Medway Oversped <= 10m Break-eve or surplus Source: Natioal Audit Office aalysis of Departmet of Health data 4 millio variace agaist pla. 19 Foudatio Trusts are predictig a surplus, ad 13 a deficit. Excludig the performace of Uiversity College Lodo Hospitals, which has a uaudited year-ed deficit of 35.9 millio, the remaiig 31 NHS Foudatio Trusts are predictig a aggregate 11.5 millio surplus. The three NHS Foudatio Trusts which icurred the largest deficits i (Bradford Teachig Hospitals (Case Study 4), Peterborough ad Stamford Hospitals ad Royal Devo ad Exeter, see paragraph 2.33) have all bee implemetig recovery plas ad report a uaudited aggregate deficit of 3.2 millio for , compared to a audited deficit of 22.9 millio i HM Treasury s Faster Closure iitiative requires all Departmetal resource accouts to be laid before the July Parliametary Recess by However, the timetable that the Departmet cosiders achievable for NHS bodies to submit audited data for the summarised ad resource accouts i will ot allow sufficiet time to prepare ad audit these accouts before the Recess. The Departmet has therefore iformed HM Treasury that it will be uable to meet the pre-recess deadlie for The Natioal Audit Office ad the Audit Commissio cotiue to discuss with the Departmet measures that will secure further advaces i the timetable at a local ad atioal level. However, a umber of issues will eed to be resolved if the accouts timetable for local bodies is to be brought forward sigificatly. I particular, it is vital that NHS Boards, Executive Directors ad fiace staff scrutiise their accouts preparatio processes to reverse the recet declie ad improve the quality of accouts submitted for audit. 32 Key developmets that will icrease the risks to fiacial balace i ad beyod iclude the extesio of Paymet by Results ad the implemetatio of Commissioig a Patiet-led NHS. While the Departmet has itroduced these policies to provide drivers to improve efficiecy ad fiacial performace, they also itroduce additioal risk Paymet by Results was implemeted for Wave 1 NHS Foudatio Trusts from 1 April 2004 across elective, o elective ad outpatiets, ad from 1 April 2005 for Wave 1a NHS Foudatio Trusts authorised by that date. It was implemeted by all acute Trusts ad Primary Care 7 Strategic Health Authorities ad Primary Care Trusts are required to submit uaudited summarisatio data by 15 May 2006 ad audited figures by 24 July Source: Departmet of Health, NHS Maual for Accouts , October 2005, p These fidigs are set out i more detail i the Audit Commissio report Early Lessos from Paymet by Results, published i October Fiacial Maagemet i the NHS

15 summary Trusts, for elective ipatiet care oly, from 1 April For o-nhs Foudatio Trusts, the Departmet deferred implemetatio for o-elective ipatiet activity ad outpatiet care util 1 April 2006, thus givig these bodies more time to prepare the ecessary systems ad resources to maage i the ew eviromet. Paymet by Results cotiues to be oe of the biggest challeges for NHS fiacial maagemet. Patiet Choice itroduced for elective care from 1 Jauary 2006 coupled with Paymet by Results icreases the potetial for fiacial istability for all NHS bodies. 34 Commissioig a Patiet-led NHS, issued by the Departmet i July 2005, has sigalled the start of a ew ad major wave of mergers ad ratioalisatio of Primary Care Trusts ad Strategic Health Authorities. A key message from previous mergers is that the operatioal performace of most orgaisatios suffers both durig the merger process ad i the period immediately afterwards. NHS bodies must take early actio to recogise ad pla for the fiacial risks that will be faced. 35 I late Jue 2005, the Secretary of State ad NHS Chief Executive wrote to the Chairs ad Chief Executives of all NHS bodies i deficit, remidig them of their resposibility to deliver fiacial balace. I December 2005, the Departmet cotracted turaroud teams to review 98 NHS bodies idetified as facig particular fiacial difficulties. These teams reviewed the bodies fiacial positio ad produced prelimiary reports o what actio could be take to assist recovery. 36 The Departmet tells us that 25 of the 26 bodies deemed to be at particular risk ow have turaroud support o the groud to help improve efficiecy ad cut costs, while the remaiig oe has a clearly defied timetable for securig this support. A further 37 bodies are expected by the Departmet to esure that they secure additioal expertise to deliver fiacial turaroud. Of these 37, the Departmet tells us that 32 ow have appropriate support o the groud. 37 All of the 98 orgaisatios have produced recovery plas to deliver recurret fiacial balace, ad these are curretly beig reviewed by Strategic Health Authority area Turaroud Directors ad maagemet teams, prior to beig released to the Natioal Programme Office. The Natioal Programme Office is iteded to provide a idepedet ad qualified view as to whether turaroud plas are viable, quatifiable ad critically that implemetatio traslates ito improved fiacial results. As at 23 May 2006, the Natioal Programme Office had formally received 11 plas from orgaisatios withi the Turaroud cohort. The Departmet expects the majority of plas to be received by mid-jue We welcome the Departmet s efforts both to reaffirm local-level resposibility for fiacial balace, ad to idetify ad address the challeges facig local bodies. The work of turaroud teams has the potetial to geerate detailed good practice applicable to the wider NHS, ad we recommed that ay lessos leared are dissemiated to all NHS bodies as soo as possible. 39 The Secretary of State for Health has asked the Audit Commissio to udertake a review of the NHS fiacial maagemet ad accoutig regime. The review will examie i more detail some of the issues covered i this report, ad will ivolve commetig o the curret regime ad recommedig chages that eable ad ecourage the NHS ad idividual bodies withi it to operate o a soud ad sustaiable fiacial footig. 40 The Departmet tells us that it has take sigificat steps to make the NHS fiacial system more trasparet from These iclude edig the practice of providig fiacial support to orgaisatios which are overspedig, which i the past has helped to mask deficits. This plaed removal of support is cosistet with Paymet by Results, whereby icome for providers should be determied by the actual activity they deliver, ad the resultig trasparecy should allow fiacial problems to be idetified ad addressed more easily. 41 The Departmet is also formalisig the system by which cash is moved betwee orgaisatios. The curret system, based o brokerage, is ot trasparet, ad does ot provide the appropriate icetives for orgaisatios to maage their cash flow effectively. From , the Departmet plas to replace the brokerage system for NHS Trusts with a system of loas ad deposits, which should make it clear whe a orgaisatio has required exteral fiacig to remai solvet. The Departmet believes that requirig bodies to pay iterest o the loas ad deposits should also ecourage effective cash maagemet. 42 We welcome these iitiatives as a meas of icreasig the trasparecy of NHS bodies year-ed positio ad performace, ad look forward to seeig evidece of their implemetatio as we audit the accouts. 43 The fiacial issues arisig i ad beyod are cosidered i more detail i Part 5. Fiacial Maagemet i the NHS 9

16 summary recommedatios May NHS bodies are facig sigificat fiacial pressures, but the challeges facig the NHS as a whole cotiue to grow. I particular, additioal resources available to the NHS will begi to reduce, ad the NHS is facig further re-orgaisatio durig Alogside this, the public will expect the NHS to cotiue to improve their access to prompt ad good-quality healthcare. I light of these challeges, it is more crucial tha ever that all NHS bodies have strog fiacial maagemet ad goverace arragemets i place. Bodies will eed to cosider the risks they face, ad the skills they have available, to maage these pressures more effectively ad allow service outcomes to be maitaied ad improved. To assist i this process, the Natioal Audit Office ad the Audit Commissio highlight four key recommedatios based o good practice idetified withi the NHS. These are supported by a umber of detailed actio poits which ca be foud i the mai body of the report. Our recommedatios are: Those NHS bodies that are able to react to fiacial ad other risks most effectively do so because they have support ad commitmet from all parts of their orgaisatio, ad have effective goverace arragemets i place. We therefore recommed that bodies develop a whole-orgaisatio approach to maagig risks, particularly i deliverig fiacial balace. Awareess ad owership of these risks must be shared betwee Boards, cliicias, fiace staff, ad NHS staff more geerally. NHS bodies are preparig for the impact of mergers ad restructurig, as well as implemetig Paymet by Results ad other atioal iitiatives. It is vital that fiacial cotrol is ot weakeed durig this period of istability, for example as a result of chages i key members of staff ad Boards. We therefore recommed that the fiacial maagemet of these chages, ad the idetificatio of skills eeded to respod to them, be made a early, Board-level priority. The curret NHS fiacial regime should cotiue to evolve to esure that it provides the right icetives ad reportig arragemets to support log-term fiacial sustaiability. This will require rigorous ad trasparet fudig ad reportig arragemets, ad we commed the Departmet s recetly aouced chages, which iclude itroducig a more Foudatio Trust-like regime for NHS Trusts. To further esure trasparecy ad comparability betwee bodies fiacial performace, the effect of the RAB carry-forward regime o their icome should be clearly disclosed i their aual accouts. Advaces are required i the accouts preparatio ad audit timetable to secure the faster closig of local NHS accouts, ad hece the atioal accouts produced by the Departmet. We therefore recommed that NHS bodies review their accouts productio processes with their auditors so that possible areas for improvemet, such as agreeig balaces ad trasactios with other parts of the NHS, are idetified ad acted upo early i the process. 10 Fiacial Maagemet i the NHS

17 summary Coclusio 44 The most sigificat fiacial challege facig NHS Trusts ad Primary Care Trusts is the achievemet of recurret fiacial balace or, i the case of NHS Foudatio Trusts, remaiig fiacially viable ad withi their Terms of Authorisatio. It is imperative for those NHS bodies with relatively small deficits to take actio ow to prevet the problem escalatig. Experiece idicates that oce a NHS body icurs a sigificat deficit, it becomes icreasigly difficult to retur to fiacial balace, particularly where maagemet s attetio is focused o resultat short-term pressures rather tha loger-term fiacial balace. NHS bodies should use the assessmets provided by auditors uder the ew Auditors Local Evaluatio framework to address the weakesses withi their fiacial maagemet arragemets. This will become icreasigly importat for those NHS Trusts itedig to apply for Foudatio Trust status, who should combie the Auditors Local Evaluatio framework with the joit Departmet ad Moitor Whole Health Ecoomy Diagostic programme to idetify ecessary improvemets. 45 Fiacial balace (ad fiacial recovery for those orgaisatios i deficit) ca oly be achieved with the support ad commitmet of all parts of a orgaisatio. The majority of fiace departmets do provide a good service, but this o its ow is ot eough. The effective maagemet of fiaces ad the skills this requires must be spread throughout NHS orgaisatios, ad o loger see as the sole preserve of the fiace fuctio. For those orgaisatios that have deficits of a sigificat size, the oly way to retur to fiacial balace will be through effective operatioal actio ad service redesig both at local level ad across health ecoomies to idetify ad deliver the efficiecy savigs required. This meas that fiace staff, maagers, cliicias ad Board members all eed to work together. I short, fiacial maagemet eeds to become everyoe s busiess. 46 The Natioal Audit Office ad the Audit Commissio are committed to workig with the Departmet, Moitor ad NHS bodies to support the NHS i the cosiderable task of improvig its fiacial maagemet arragemets. Fiacial Maagemet i the NHS 11

18 part oe Part oe Itroductio 12 Fiacial Maagemet i the NHS

19 part oe What this report is about 1.1 Followig the audit of the accouts of idividual NHS orgaisatios, the summarised accouts of Strategic Health Authorities, Primary Care Trusts ad NHS Trusts, ad the cosolidated accouts of NHS Foudatio Trusts, our report: summarises the aggregate fiacial performace of the NHS i ad the fiacial performace of idividual NHS orgaisatios (Part 2). explores what is meat by deficits ad overspeds i the NHS fiace regime, cosiders the circumstaces i which NHS orgaisatios fall ito fiacial difficulties, ad examies the ways i which some bodies have retured to fiacial balace (Part 3). outlies the results of the audits of idividual orgaisatios, ad summarises the fiacial maagemet issues faced by the NHS i (Part 4). sets out the mai fiacial maagemet issues faced by NHS bodies i ad beyod (Part 5), icludig a commetary o the uaudited year-ed fiacial positio of the NHS i Structure ad fudig of the Natioal Health Service 1.2 Our report cosiders the performace of the followig 615 NHS orgaisatios: 28 Strategic Health Authorities resposible for performace-maagig the Primary Care Trusts ad NHS Trusts withi their area. 303 Primary Care Trusts resposible for assessig the eed for healthcare provisio, plaig ad commissioig health services, ad improvig health. 259 NHS Trusts resposible for providig secodary health care. 15 of these NHS Trusts became NHS Foudatio Trusts durig the year. 25 NHS Foudatio Trusts resposible for providig secodary health care, but subject to a differet fiacial, performace-maagemet ad audit regime from NHS Trusts. Te of these bodies were NHS Foudatio Trusts for the whole year, while 15 bega as NHS Trusts but became NHS Foudatio Trusts durig the year. Fiacial Maagemet i the NHS 13

20 part oe 1.3 The majority of fudig for the NHS is provided by the Departmet of Health (the Departmet). The Departmet provides resources directly to Strategic Health Authorities ad Primary Care Trusts. Primary Care Trusts pay NHS Trusts, NHS Foudatio Trusts, primary healthcare providers, ad private-sector healthcare providers for the healthcare that they commissio from them. NHS Trusts ad Foudatio Trusts also receive a small amout of fudig from the Departmet or other sources, such as local authorities ad charitable doatios. 1.4 Figure 6 summarises the accoutability ad fudig arragemets i the NHS. 6 NoteS Structure of the NHS i Eglad i ad Departmet of Health Primary Care Trusts Strategic Health Authorities Fudig Source: Natioal Audit Office Parliamet Accoutability Idepedet Regulator of NHS Foudatio Trusts ( Moitor ) NHS Trusts NHS Foudatio Trusts 1 Some fudig also goes from the Departmet directly to NHS Trusts ad Foudatio Trusts, chiefly for educatio, traiig ad research. 2 Primary Care Trusts also commissio healthcare from primary healthcare providers ad private-sector healthcare providers, as well as social care from o-nhs providers. 3 Moitor is fuded via the Departmet from fuds voted by Parliamet. 1.5 The fudig provided to the NHS is reported i the Departmet s cosolidated resource accout, which is audited by the Comptroller ad Auditor Geeral. The Departmet s resource accout for was laid before the House of Commos o 14 November The idividual accouts of Strategic Health Authorities, Primary Care Trusts, ad NHS Trusts are audited by auditors appoited by the Audit Commissio uder the Audit Commissio Act These appoited auditors provide a audit opiio o the aual accouts of each orgaisatio. 1.7 The Departmet produces accouts summarisig the fiacial statemets of Strategic Health Authorities, Primary Care Trusts ad NHS Trusts. The Comptroller ad Auditor Geeral is required uder the Natioal Health Service Act 1977 to certify each of the summarised accouts ad to lay copies of them, together with his report o them, before both Houses of Parliamet. The Departmet s Summarised Accouts for , together with the Comptroller ad Auditor Geeral s Certificates ad Reports, were laid before the House o 7 Jue 2006, 10 accompayig this Report. 1.8 The idividual accouts of each NHS Foudatio Trust are audited by auditors appoited by the Foudatio Trust s Board of Goverors. These idividual accouts are cosolidated by the Idepedet Regulator of NHS Foudatio Trusts ( Moitor ), ito a sigle accout, which is audited by the Comptroller ad Auditor Geeral uder a agreemet with Moitor. This cosolidated accout is laid before both Houses of Parliamet as part of Moitor s statutory reportig duty uder the Health ad Social Care (Commuity Health ad Stadards) Act The Cosolidated Accout of NHS Foudatio Trusts for was laid before Parliamet o 22 November Figure 7 shows the audit arragemets for NHS bodies i Departmet of Health Resource Accouts , HC 668, 14 November NHS Summarised Accouts , HC 1092-II, 7 Jue Review ad Cosolidated Accouts of NHS Foudatio Trusts , HC 622, 22 November Fiacial Maagemet i the NHS

21 part oe 7 Audit arragemets i the Natioal Health Service i Parliamet Reports Audit Commissio Appoit ad provide guidace to appoited auditors ad moitor the quality of their work. Places reliace upo Comptroller ad Auditor Geeral Audits NHS summarised accouts, takig assurace from the work of the Audit Commissio ad their appoited auditors. Audits cosolidated NHS Foudatio Trust accouts, takig assurace from the work of idividual NHS Foudatio Trusts auditors. Cosolidated Accouts Maagemet Letters Places reliace upo Idepedet Regulator of NHS Foudatio Trusts ( Moitor ) Resposible for productio of cosolidated NHS Foudatio Trust accouts, submits these to the Comptroller ad Auditor Geeral for audit. Summarised Accouts Maagemet Letters Uderlyig Accouts Departmet of Health Prepare summarised accouts ad submit them to the Comptroller ad Auditor Geeral for audit. NHS Foudatio Trusts Each NHS Foudatio Trust prepares idividual accouts for audit by its chose auditors ad submits these accouts to Moitor. Uderlyig Accouts Accouts Audit opiios ad Maagemet Letters Appoited auditors Audit Strategic Health Authorities, NHS Trusts ad Primary Care Trusts ad form audit opiios. Accouts Audit opiios ad Aual Audit Letters Strategic Health Authorities, NHS Trusts ad Primary Care Trusts Each orgaisatio prepares idividual accouts for audit by the appoited auditors ad submits these accouts to the Departmet of Health. Foudatio Trust Auditors Either a officer of the Audit Commissio or a privatesector accoutacy firm, appoited by idividual NHS Foudatio Trusts to audit their accouts ad form audit opiios. Source: Natioal Audit Office Fiacial Maagemet i the NHS 15

22 part two Part two Fiacial performace i Fiacial Maagemet i the NHS

23 part two 2.1 This part sets out the fiacial performace of the NHS i , as reported i the idividual NHS bodies accouts ad i the NHS summarised accouts. It also examies the effects of fiacial support o bodies reported fiacial positio ad outlies a umber of issues aroud fiacial support. It raises cocers about the trasparecy of the curret fiacial support regime, ad reports o the actio the Departmet is takig to improve this regime i future. Fiacial duties ad targets 2.2 The Departmet is resposible for esurig that the NHS lives withi the resources allocated to it by Parliamet. Strategic Health Authorities, Primary Care Trusts ad NHS Trusts also have a umber of fiacial duties ad targets. These iclude duties set out i statute ad targets set by the Departmet, ad vary accordig to the type of body. The duties ad targets ad the performace of these bodies agaist their respective targets are set out i Aex NHS Foudatio Trusts are ot subject to the same fiacial duties ad targets as NHS Trusts. They have sigificatly more freedoms to raise capital from both public ad private sectors ad retai operatig surpluses for ivestmet to provide future services. They are also free from the statutory duty to break eve, ad hece reportig a deficit does ot impact o their future icome i the way it does for NHS Trusts (Part 3). 2.4 However, they must adhere to the coditios set out i their Terms of Authorisatio, which iclude specific limits o the amout of debt fiace they ca raise ad the proportio of their icome that ca be geerated through private treatmet charges (Aex 2). They are also subject to Moitor s Compliace Framework, which requires moitorig o at least a quarterly basis (mothly for high-risk trusts). They do ot have access to NHS fiacial support, ad are subject to a differet accoutig regime from other NHS bodies. 2.5 NHS Trusts each have a statutory duty 12 to esure that their reveue is ot less tha sufficiet, takig oe fiacial year with aother, to meet outgoigs properly chargeable to reveue accout. The Secretary of State for Health has iterpreted this duty as beig met if ay deficit is recovered withi the followig two fiacial years. The Strategic Health Authority may exceptioally exted the recovery period to four years. 2.6 Strategic Health Authorities ad Primary Care Trusts have a statutory duty 13 to cotai their expediture withi set limits. Separate limits for reveue ad capital expediture ad cash usage are set by the Secretary of State. 12 Sectio 10 of the Natioal Health Service ad Commuity Care Act Sectios 12 ad 13 of the Govermet Resources ad Accouts Act Fiacial Maagemet i the NHS 17

24 part two 2.7 I our report: achievig a i-year surplus or break-eve positio for NHS Trusts; ad remaiig withi reveue resource limits for Strategic Health Authorities ad Primary Care Trusts will collectively be referred to as achievig fiacial balace. NHS Foudatio Trusts do ot have a statutory or Departmetal duty to break eve, ad icurrig a deficit does ot ecessarily mea a breach of their Terms of Authorisatio. Aggregate performace of the NHS The Departmet did ot meet its target of achievig fiacial balace across all NHS bodies i There was a icrease i the umber of idividual bodies reportig a deficit or oversped, icludig a umber of NHS Foudatio Trusts. The scale of deficits was also greater tha i We remai cocered about the trasparecy of the curret regime for fiacial support, but welcome actio beig take by the Departmet to address these cocers. 2.8 I , the Departmet did ot meet its target of esurig that fiacial balace was achieved i aggregate across the idividual orgaisatios which comprise the NHS. The aggregate reveue oversped, icludig NHS Foudatio Trusts, was millio, represetig 0.38 per cet of the total reveue expediture of 66.3 billio. This compares to a udersped of 65.4 millio (0.10 per cet) i Figure 8 shows the total aggregate gross ad et performace by type of NHS orgaisatio. 2.9 Aex 1 shows the performace of NHS orgaisatios (excludig NHS Foudatio Trusts) by Strategic Health Authority area. Deficits ad surpluses by type of NHS orgaisatio saw a icrease i the umber of deficits reported by NHS bodies. This icrease i deficits ca be attributed to a combiatio of: steady progress i recet years towards more trasparet NHS fiacial reportig; ad some deterioratio i uderlyig performace. However, quatifyig the role played by each is difficult Figure 9 shows the umber of each type of NHS body (excludig NHS Foudatio Trusts) reportig a deficit or oversped I , oe NHS Trust (Ashford ad St Peter s NHS Trust) failed i its statutory duty to break eve takig oe year with aother. 15 Moreover, i there was a icrease i the umber of NHS Trusts ad Primary Care Trusts failig to achieve i-year fiacial balace compared to For the first time sice the creatio of Strategic Health Authorities i 2002, oe of these also failed to achieve i-year fiacial balace i The Departmet defies a NHS Trust s deficit as sigificat if it exceeds 0.5 per cet of total aual icome. Usig this measure, 60 NHS Trusts (23 per cet) icurred a sigificat deficit i This is a icrease o , whe 49 NHS Trusts (18 per cet) icurred a sigificat deficit Applyig a similar criterio to reveue resource limit breaches by Primary Care Trusts, 75 Primary Care Trusts (25 per cet) breached their reveue resource limits by a sigificat amout. This is a cosiderable icrease o , whe 27 Primary Care Trusts (ie per cet) had a sigificat reveue oversped Figure 10 o page 20 shows the umber of sigificat deficits (or overspeds agaist the reveue resource limit for Strategic Health Authorities ad Primary Care Trusts), excludig NHS Foudatio Trusts (see paragraphs ). Usig the same measure of sigificace, it also shows the umber of sigificat surpluses (or uderspeds agaist reveue resource limit for Strategic Health Authorities ad Primary Care Trusts). 14 The udersped figure reflects a prior-year adjustmet made to the out-tur of Kesigto ad Chelsea Primary Care Trust i The effect of this adjustmet was to icrease the Primary Care Trust deficit by 7.1 millio, ad hece reduce the overall NHS udersped by the same amout. 15 Aex 2 details how this duty is iterpreted by the Departmet. 18 Fiacial Maagemet i the NHS

25 part two 8 Aggregate reveue out-tur by type of NHS orgaisatio Aggregate i-year Aggregate i-year surplus/udersped deficit/oversped Net total Net total millio millio millio millio Strategic Health Authorities (0.4) Primary Care Trusts 69.8 (335.1) (265.3) (3.2) 3 NHS Trusts 61.0 (382.7) (321.7) (137.6) NHS Foudatio Trusts 3.9 (40.8) (36.9) N/A Total (759.0) (251.2) 65.4 Source: Departmet of Health ad Moitor data, ad audited accouts of idividual NHS bodies NOTE 1 Some colums may ot cast due to roudig. 2 There are sigificat differeces betwee the accoutig regime used by NHS Foudatio Trusts ad that used by other NHS bodies (paragraph 4.61). Care must therefore be take i comparig their respective fiacial performace. 3 Primary Care Trusts origially reported a udersped of 3.9 millio overall i However, a prior-period adjustmet of 7.1 millio at Kesigto ad Chelsea Primary Care Trust has chaged this to a 3.2 millio oversped, reducig the overall udersped of the NHS to 65.4 millio i The Departmet was ot required to adjust for this i the NHS summarised accouts sice the sum is ot material by value i the cotext of those accouts. It therefore recogised the 7.1 millio of expediture i rather tha adjustig the figure for Thus the aggregate oversped reported i the summarised accouts of Primary Care Trusts is millio, with a udersped of 3.9 millio for However, for the purposes of this report we have adjusted the figures to esure that the actual local positio is accurately reflected i the detailed aalysis. 9 Number of NHS orgaisatios (excludig NHS Foudatio Trusts) reportig a deficit or oversped Reportig a deficit Total Reportig a deficit Total or oversped bodies or oversped bodies Number % Number % Strategic Health Authorities Primary Care Trusts NHS Trusts Total Source: Departmet of Health data, ad audited accouts of idividual NHS bodies NOTE 1 Te NHS Foudatio Trusts were i operatio for the full year ad 15 NHS Trusts became NHS Foudatio Trusts partway through The performace of these 15 prior to this chage is icluded withi NHS Trusts above while their subsequet performace as NHS Foudatio Trusts is outlied i paragraphs Thus the total umber of NHS bodies at ay give time was 600, ad the umber of NHS Trusts at year-ed was 244. Fiacial Maagemet i the NHS 19

26 part two Fiacial support 2.16 Fiacial support (which is ot available to NHS Foudatio Trusts) is defied i the Departmet s Maual for Accouts 16 as additioal icome durig the year, provided wholly to assist i maagig fiacial problems. This ca come from oe or more of the followig sources: The NHS Bak (Aex 4) Primary Care Trusts Strategic Health Authorities 2.17 The Departmet has made progress i makig the NHS support regime more trasparet. I particular, it has removed year-ed flexibilities such as capital-to-reveue trasfers, which previously allowed bodies to boost their i-year reveue positio at the expese of loger-term ivestmet. Followig previous recommedatios by the Natioal Audit Office ad the Audit Commissio, it has also icreased the specific disclosures of fiacial support required i local bodies accouts. We welcome these developmets, ad look forward to further improvemets i trasparecy from , whe the Departmet replaces the curret support regime with a system of loas ad deposits ad further progress is made i allowig deficits to remai where they are icurred (paragraphs 2.26 ad 2.27) Followig recommedatios made i our previous report o NHS fiacial maagemet, 17 from Strategic Health Authorities ad Primary Care Trusts were required to report support received ad its effect o their over or udersped for the year Strategic Health Authorities reported receivig a total of 6.8 millio of support i I each case, this support was provided by other bodies withi the Strategic Health Authority s ow local health ecoomy. Figure 11 shows the three Strategic Health Authorities receivig support ad the effect this had o their reported over or udersped for the year. 10 Number of NHS orgaisatios (excludig NHS Foudatio Trusts) reportig a sigificat surplus or deficit Sigificat surpluses Sigificat deficits No. % % No. % % Strategic Health Authorities Primary Care Trusts NHS Trusts Total Source: Departmet of Health data ad audited accouts of idividual NHS bodies 11 Strategic Health Authorities receivig fiacial support i Strategic Health Authorities Reported uder/(over)sped Fiacial support icluded i uder/(over) sped reported uder/(over) sped excludig fiacial support millio millio millio Essex South West Lodo West Midlads South (0.4) 3.9 (4.3) Source: Audited accouts of Strategic Health Authorities 16 Departmet of Health, NHS Trust Maual for Accouts , paragraph Natioal Audit Office/Audit Commissio, Fiacial Maagemet i the NHS: NHS (Eglad) Summarised Accouts , Jue 2005, p Fiacial Maagemet i the NHS

27 part two 2.20 I , Primary Care Trusts reported receivig a total of 204 millio of support, either from the NHS Bak or from withi their local health ecoomy. I total, 77 Primary Care Trusts received such support, with three receivig amouts of 10 millio or more. Figure 12 shows the Primary Care Trusts reportig receipt of 10 millio or more of support, ad the effect this had o their reported over or uderspeds agaist reveue resource limits I , NHS Trusts reported receivig a total of 393 millio of support, either from the NHS Bak or from withi their local health ecoomy ( : 344 millio). I total, 73 Trusts reported receivig support, with 29 of those Trusts receivig 5 millio or more. Figure 13 shows the NHS Trusts reportig 10 millio or more of support, ad the effect this had o their reported surplus or deficit The above aalysis is based o figures reported i a ote to NHS bodies accouts, which requires them to disclose the amout of fiacial support icluded i their reported out-tur. Although this ew disclosure has improved the overall trasparecy of bodies fiacial performace, we are cocered that i there was still icosistecy ad ambiguity i classifyig ad reportig the complex fudig flows withi local health ecoomies. 12 Primary Care Trusts receivig fiacial support of 10 millio or more i Primary Care Trust reported uder/(over)sped Fiacial support icluded i uder/(over) sped reported uder/(over) sped excludig fiacial support millio millio millio Carlisle ad District (14.9) Morecambe Bay (13.8) West Cumbria (11.7) Source: Audited accouts of Primary Care Trusts 13 NHS Trusts receivig fiacial support of 10 millio or more i NHS Trust reported surplus/(deficit) Fiacial support icluded Surplus/(deficit) excludig i surplus/(deficit) fiacial support millio millio millio Mid Yorkshire Hospitals (19.9) 30.0 (49.9) Royal Corwall Hospitals (12.8) North Bristol (17.6) Oxford Radcliffe Hospitals (17.1) Essex Rivers Healthcare (13.7) Ashford ad St Peter s Hospitals (12.9) St Heles ad Kowsley Hospitals (12.0) South Tees Hospitals (8.9) 12.0 (20.9) Baret ad Chase Farm Hospitals (11.2) Source: Audited accouts of NHS Trusts NOTES 1 See paragraph Rows may ot cast due to roudig. Fiacial Maagemet i the NHS 21

28 part two 2.23 Although the Departmet believes that the majority of NHS bodies have utilised ad reported support trasparetly ad cosistetly, we are cocered that risks remai aroud the proper idetificatio ad disclosure of support, particularly where this is uplaed. I practice, it is extremely difficult to idetify whether late adjustmets to icome ad expediture flows, for example adjustmets to service level agreemets betwee Primary Care Trusts ad Trusts, actually costitute uplaed support istituted at short otice to deliver fiacial balace. There are a umber of cases where such adjustmets appear to correspod exactly to the amout required by a body to break eve, suggestig that they were based ot o actual activity levels but o the size of a deficit idetified at the year-ed Eve where proper disclosure is made, uplaed support is sometimes used as a last-miute fix to prevet bodies breachig statutory fiacial duties. I , Royal Corwall Hospitals NHS Trust received 15.5 millio of uplaed support i additio to 10.9 millio of plaed support. This was precisely the figure required to elimiate its cumulative deficit of 13.6 millio ad hece meet its statutory duty to break eve withi four years (icludig a agreed extesio). Although this arragemet was fully disclosed i the Trust s aual accouts, it is evidet that the curret regime allows bodies to receive fiacial support at short otice to avoid breachig statutory duties. This cotrasts with the regime for NHS Foudatio Trusts, which do ot have access to such support to rescue the positio at year ed The Departmet tells us that it has take sigificat steps to make the NHS fiacial system more trasparet from These iclude edig the practice of providig fiacial support to overspedig orgaisatios ad formalisig the system by which cash is moved betwee orgaisatios. The curret system, based o brokerage, is ot trasparet, ad does ot provide the appropriate icetives for orgaisatios to maage their cash flow effectively. From , the Departmet plas to replace the brokerage system for NHS Trusts with a system of loas ad deposits, which should make it clear whe a orgaisatio has required exteral fiacig to remai solvet. The Departmet believes that requirig bodies to pay iterest o the loas ad deposits should also ecourage effective cash maagemet We welcome these iitiatives as a meas of icreasig the trasparecy of NHS bodies year-ed positio ad performace, ad look forward to seeig evidece of their implemetatio as we audit the accouts. Results of idividual NHS bodies Primary Care Trusts 2.28 There were Primary Care Trusts reportig overspeds of more tha 5 millio agaist their reveue resource limit i , compared to five i (Figure 14). The results are stated after fiacial support to esure they are comparable with prior-year figures Such practices appear at odds with the Departmet s stated itetio that deficits remai where they are icurred. 18 Moreover, despite the requiremet for NHS bodies to disclose the support they receive i their aual accouts, there is evidece that ot all of them did so correctly i Statemet by the Departmet to the Parliametary Health Select Committee, 16 October Dacorum Primary Care Trust was required to make a prior-period adjustmet to its accouts i , reclassifyig 1.2 millio of expediture to ad therefore icreasig its oversped from 4.8 millio to 6.0 millio. The Departmet were ot required to adjust for this figure i the NHS summarised accouts sice it is ot material by value. Hece the Departmet s summarised accout figures show the umber of Primary Care Trusts with overspeds greater tha 5 millio as 27 rather tha Fiacial Maagemet i the NHS

29 part two 14 Primary Care Trusts with overspeds of over 5 millio Primary Care Trust Oversped millio Oversped before support millio Primary Care Trust Oversped 1 millio Bedfordshire Heartlads (14.5) (14.5) Hammersmith ad Fulham (8.5) Hilligdo (13.5) (13.5) Kesigto ad Chelsea (8.3) 2 Suffolk West (12.5) (12.5) Ipswich (5.6) Kesigto ad Chelsea (12.0) (12.0) Dartford ad Gravesham (5.6) Keet ad North Wiltshire (10.2) (13.1) North Devo (5.4) Ipswich (10.1) (12.3) New Forest (8.6) (12.1) Wadsworth Teachig (8.2) (8.2) Cambridge City (7.6) (7.6) Souther Norfolk (7.2) (9.8) Chelmsford (7.1) (11.2) North Stoke (6.8) (6.8) Fareham ad Gosport (6.8) (8.0) North ad East Corwall (6.7) (7.9) Selby ad York (6.6) (6.6) Suffolk Coastal (6.2) (7.9) Houslow (6.2) (6.2) Yorkshire Wolds ad Coast (6.1) (6.1) Luto Teachig (6.0) (6.0) Dacorum (6.0) (6.0) Guildford ad Waverley (5.9) (5.9) West of Corwall (5.7) (7.0) Cetral Corwall (5.3) (6.8) North Norfolk (5.3) (7.0) North Devo (5.3) (5.3) North Somerset (5.2) (5.2) East Hampshire (5.2) (6.4) South West Oxfordshire (5.2) (5.2) Source: Audited accouts of Primary Care Trusts NOTES 1 Fiacial support figures were ot separately disclosed i the accouts of Primary Care Trusts (paragraph 2.18). The oversped figures therefore iclude fiacial support. 2 Kesigto ad Chelsea Primary Care Trust was required to make a prior-year adjustmet to its accouts i , icreasig expediture for by 7.1 millio. The ( 8.3 millio) oversped for reflects this adjustmet. Fiacial Maagemet i the NHS 23

30 part two NHS Trusts 2.29 I there were 26 NHS Trusts with a deficit exceedig 5 millio, compared with 12 i These results are stated after fiacial support is take ito accout. Whe support is removed, some of the deficits are sigificatly larger. Figure 15 shows the NHS Trusts reportig deficits of over 5 millio i ad It also shows the effect of support o these figures. NHS Foudatio Trusts was the first year of NHS Foudatio Trusts, with 10 i operatio for the full year ad 15 more authorised durig the year (see Part 4). The performace of these 15 as NHS Trusts prior to this chage is icluded i Figures 9 ad 10, o pages 19 ad 20, ad their subsequet performace withi the NHS Foudatio Trust figures i the followig paragraphs There are importat differeces betwee the fudig ad accoutig regime for NHS Foudatio Trusts ad for other NHS bodies, which mea that care must be take i comparig reported performace (see paragraph 4.61). I particular, they do ot have access to fiacial support (paragraphs 2.16 to 2.26), ad must charge impairmets (dowward revaluatios) to their icome ad expediture accout. Withi this regime, 12 out of 25 NHS Foudatio Trusts (48 per cet) reported deficits i Applyig the defiitio of sigificat surpluses ad deficits used above, three NHS Foudatio Trusts (12 per cet) reported a surplus greater tha 0.5 per cet of total icome, while seve (28 per cet) icurred a deficit greater tha 0.5 per cet of total icome Four NHS Foudatio Trusts reported a deficit of over 5 millio i These are show i Figure 16. To reflect the differet treatmet of impairmets uder the Foudatio Trust regime, their effect o out-tur is also show where applicable. These four NHS Foudatio Trusts have all bee implemetig recovery plas durig Uaudited year-ed figures at Peterborough ad Stamford, Bradford (Case Study 4) ad Royal Devo ad Exeter show a sigificatly improved fiacial performace i (see paragraph 5.7). The fiacial performace of Uiversity College Lodo Hospitals deteriorated durig the year ad remais a area of specific cocer for Moitor. Performace of Strategic Health Authority areas 2.34 I , 16 of the 28 Strategic Health Authority areas reported a aggregate deficit across all the idividual NHS bodies withi their area (which exclude NHS Foudatio Trusts), compared to seve areas i Strategic Health Authorities are ot resposible for performace-maagig NHS Foudatio Trusts, which are istead regulated by the Idepedet Regulator of NHS Foudatio Trusts, Moitor. Figure 17 o page 26 shows the Strategic Health Authority areas with a aggregate deficit i ad , both before ad after support from the NHS Bak is take ito accout Oly NHS Bak support is relevat i cosiderig the effects of fiacial support o the whole Strategic Health Authority area, as it origiates from a outside source (the Departmet). Support provided by oe body to aother i the same Strategic Health Authority area will have o et impact whe the results of all bodies are aggregated across the area NHS Foudatio Trusts do ot have access to fiacial support, either iterally or from the NHS Bak, ad those with surpluses do ot provide fiacial support to other bodies. 24 Fiacial Maagemet i the NHS

31 part two 15 NHS Trusts with deficits of over 5 millio NHS Trust Deficit Deficit before support millio millio Surrey ad Sussex Healthcare (30.7) (32.4) St George s Healthcare (21.7) (21.7) Mid Yorkshire Hospitals (19.9) (49.9) Hammersmith Hospitals (17.8) (17.8) Royal West Sussex (15.5) (15.5) North West Lodo Hospitals (11.7) (11.7) Southampto Uiversity Hospitals (11.6) (18.5) Royal Free Hampstead (10.2) (17.2) Shrewsbury ad Telford Hospitals (10.1) (19.3) Brighto ad Sussex Uiversity Hospitals (10.0) (13.0) West Hertfordshire Hospitals (10.0) (10.0) Quee Elizabeth Hospital (9.2) (13.7) Royal Wolverhampto Hospital (9.0) (9.0) South Tees Hospitals (8.9) (20.9) South Warwickshire Geeral Hospitals (8.8) (11.6) East ad North Hertfordshire (8.6) (11.6) Kigs Ly ad Wisbech Hospitals 1 (8.5) (8.5) Bedford Hospital (8.5) (8.5) Plymouth Hospitals (8.3) (14.3) Sadwell ad West Birmigham Hospitals (7.8) (7.8) Cetral Machester ad Machester (7.7) (10.7) Childre s Uiversity Hospitals West Suffolk Hospital (7.6) (7.6) The Lewisham Hospital (7.5) (7.5) Ipswich Hospital (6.4) (6.4) Hull ad East Yorkshire Hospitals (5.5) (7.5) Westo Area Health (5.2) (5.2) NHS Trust Deficit Deficit before support millio millio Mid Yorkshire Hospitals (18.6) (30.6) Worcestershire Acute Hospitals (12.8) (12.8) Maidstoe ad Tubridge Wells (9.0) (9.0) Brighto ad Sussex (7.9) (11.4) Plymouth Hospitals (7.8) (11.0) Royal Wolverhampto Hospital (7.6) (7.6) Royal Corwall Hospitals (5.8) (15.3) Essex Rivers Healthcare (5.8) (5.8) Southampto Uiversity Hospitals (5.4) (8.4) Kigs Ly ad Wisbech Hospitals (5.4) (5.4) Buckighamshire Hospitals (5.2) (9.2) Good Hope Hospital (5.0) (5.0) Source: Departmet of Health data based o audited accouts of NHS Trusts Note 1 This Trust was reamed Quee Elizabeth Hospital Kigs Ly NHS Trust i April NHS Foudatio Trusts with deficits of over 5 millio NHS Foudatio Trust reported surplus/(deficit) Impairmets recogised deficit before impact accordig to FRS 11 of impairmets millio millio millio Bradford Teachig Hospitals (8.0) (8.0) Peterborough ad Stamford Hospitals (7.7) (7.7) Royal Devo ad Exeter (7.3) (0.8) (6.5) Uiversity College Lodo (5.9) (3.6) (2.3) Source: Audited accouts of NHS Foudatio Trusts/Moitor Fiacial Maagemet i the NHS 25

32 part two 17 Strategic Health Authorities reportig a aggregate deficit Strategic Health Authority area Aggregate out-tur millio Strategic Health Authority area Aggregate out-tur millio After NHS Bak support Before NHS Bak support After NHS Bak support Before NHS Bak support Norfolk, Suffolk ad Cambridgeshire (69) (69) North West Lodo (65) (65) Bedfordshire ad Hertfordshire (61) (61) Hampshire ad Isle of Wight (40) (40) Surrey ad Sussex (33) (53) Shropshire ad Staffordshire (23) (23) South West Lodo (20) (20) Essex (14) (14) South West Peisula (11) (11) West Midlads South (10) (10) Avo, Gloucestershire ad Wiltshire (8) (48) North ad East Yorkshire (8) (8) ad Norther Licolshire Thames Valley (6) (16) Ket ad Medway (2) (2) Leicestershire, Northamptoshire (2) (2) ad Rutlad South East Lodo (1) (1) South West Peisula (14) (14) North West Lodo 1 (20) (20) Norfolk, Suffolk ad Cambridgeshire (10) (10) Hampshire ad Isle of Wight (9) (9) Ket ad Medway (5) (22) Surrey ad Sussex (5) (45) Avo, Gloucestershire ad Wiltshire (4) (74) Thames Valley 10 (15) Source: Departmet of Health data based o audited accouts of idividual NHS bodies ad Departmet of Health data o NHS Bak support Note 1 I , Kesigto ad Chelsea Primary Care Trust was required to make a prior-year adjustmet to its reported out-tur for The effect of this was to icrease its reported deficit for by 7.1 millio. This also icreased the deficit across the North West Lodo Strategic Health Authority area from 13 millio to 20 millio. 26 Fiacial Maagemet i the NHS

33 part two Fiacial Maagemet i the NHS 27

34 part three Part THREE Returig to fiacial balace 28 Fiacial Maagemet i the NHS

35 part three 3.1 The millio aggregate deficit across the NHS i was relatively small i the cotext of 66.3 billio of reveue expediture (0.38 per cet), ad ideed 72 per cet of NHS bodies achieved break-eve or a surplus i However, almost a quarter of NHS bodies reported a deficit greater tha 0.5 per cet of icome, ad maagig ad recoverig sigificat deficits ca have a major impact o a body s ability to deliver services ad meet performace targets 3.2 This part of our report explores what is meat by deficits ad overspeds i the fiace regime for NHS Trusts (excludig Foudatio Trusts), Primary Care Trusts ad Strategic Health Authorities, cosiders the circumstaces i which NHS orgaisatios fall ito fiacial difficulties, ad examies the ways i which some bodies have retured to fiacial balace. Backgroud to deficits i the NHS Curret fudig arragemets for the NHS are based o the Departmet s applicatio of the Resource Accoutig ad Budgetig (RAB) regime to NHS bodies. Some bodies have expressed cocers that these arragemets make it difficult to recover deficits oce these have bee icurred. However, if a body does ot recover a deficit itself, resources must be diverted from their iteded recipiets elsewhere i the system. NHS Trusts 3.3 The followig terms are relevat i cosiderig the fiacial regime for NHS Trusts: Retaied (or i-year ) Surplus/Deficit the Trust s fial surplus or deficit for the year after accoutig for all operatig expeses ad iterest; Cumulative Surplus/Deficit the sum of the Trust s curret ad previous retaied surpluses ad deficits sice , whe the curret defiitio of Trusts statutory break-eve duty (Aex 2) was agreed. Whe a ew NHS Trust is created it does ot iherit the historic break-eve performace of its predecessor orgaisatios, as its cumulative breakeve positio is set to zero o its iceptio. 3.4 Uder the cross-govermet Resource Accoutig ad Budgetig framework (RAB) the Departmet has a statutory duty to remai withi its resource limits from oe year to the ext. NHS Trusts are withi the Departmet s Resource Budgetig boudary, ad hece ay failure by them to break eve is charged agaist the Departmetal Expediture Limit (DEL). Ed-Year Flexibility rules require DEL overspeds ad uderspeds to be carried forward ito the followig year, ad hece ay overall deficit by NHS bodies must be offset agaist other budgets or recovered i subsequet years to avoid breachig the DEL. We have cocers that RAB is ot applied cosistetly to local bodies, ad that its effects o their fiacial performace are ot sufficietly trasparet. Fiacial Maagemet i the NHS 29

36 part three 3.5 The Departmet applies the priciples of RAB to the NHS, which meas that the fudig ad accoutability relatioship betwee HM Treasury ad the Departmet is effectively mirrored i the Departmet s relatioship with the Strategic Health Authorities. Strategic Health Authority areas icurrig a deficit (whether attributable to Trusts, Primary Care Trusts or the Strategic Health Authority itself) therefore have their overall resource allocatio reduced by the amout of that deficit i the followig year. Similarly, Strategic Health Authority areas which udersped have a icreased level of resources available the followig year. 3.6 RAB operates o the priciple that, if oe part of the system overspeds withi a fixed resource limit, the aother must udersped by a equal amout to avoid that resource limit beig breached. This meas that fidig the resources to cover deficits icurred withi the NHS will ievitably have a impact somewhere i the system. The alteratives to idividual bodies repayig their ow deficits through RAB resource reductios are either that the Departmet withholds resources to cover the deficit cetrally, 20 or that NHS bodies with a surplus lose uspet resources rather tha carryig them forward. As the Departmet allows uderspedig NHS bodies to keep resources that they have ot cosumed, it requires overspedig bodies to reduce their costs ad repay the oversped themselves. 3.7 Strategic Health Authorities ormally pass o the icrease or decrease i resources to the NHS bodies resposible for icurrig it. I the case of Trusts, this ivolves adjustig their service level agreemets with Primary Care Trusts, which meas that a deficit reported by a NHS Trust i oe year is ormally deducted from its cotract icome the followig year. Whilst the priciples of this system are cosistet with the fiacial duties of the NHS ad the Departmet, we are cocered that Strategic Health Authorities have applied the regime differetly across the coutry. This has led to ucertaity withi the NHS about the fairess ad cosistecy of the RAB system as applied to local bodies. A more cosistet applicatio of the carry forward regime to local bodies would promote greater uderstadig of the system withi the NHS, ad icrease comparability betwee local bodies performace. However, there is a iheret tesio betwee applyig the system rigidly ad uiversally, ad allowig Strategic Health Authorities to maage regioal health ecoomies accordig to local circumstaces. These issues will be examied i more detail as part of the Audit Commissio s forthcomig review of the NHS fiacial maagemet ad accoutig regime (paragraph 5.37). 3.8 Notwithstadig the tesio betwee cosistet applicatio ad flexible maagemet of the local positio, more trasparecy is required i bodies accouts to show the effect of RAB carry-forward adjustmets, ad the extet to which these have bee applied i idividual cases. We make recommedatios below to address this. 3.9 I additio to affectig the followig year s icome as outlied above, the Trust s i-year retaied surplus or deficit is also posted to the balace sheet ad carried forward to future years to give a cumulative positio. This is used to assess whether the Trust has fulfilled its statutory duty to break eve takig oe year with aother (Aex 2). This duty is deemed to be met if a material 21 cumulative deficit is recovered withi the followig two fiacial years. Exceptioally, extesios of up to a total of four years ca be give, subject to the Trust agreeig a recovery pla with the Strategic Health Authority The combiatio of a carried-forward cumulative deficit ad a reductio i icome the followig year is ofte kow as a double deficit. By reducig Trusts icome to recover prior-year deficits, the Departmet aims to ecourage these bodies to fulfil their break-eve duty. However, a umber of Trusts have expressed cocers to us that oce fiacial balace has bee lost, the resultat cut i icome uder the RAB regime makes recovery doubly difficult Figure 18 illustrates how the RAB carry-forward would operate over a five-year period for a NHS Trust first icurrig a deficit, the reducig expediture to break-eve i year two ad post a surplus i year three. The deficit i year oe creates a cumulative deficit of 10 millio ad also reduces year-two icome by 10 millio. Similarly, the 10 millio surplus i year three both reverses the cumulative deficit ad icreases icome i year four by 10 millio. The effect of these movemets o the Trust s cumulative positio is show o the bottom two lies. The example illustrates that if the required expediture reductio ca be achieved, the et adjustmet to resources is il ad the double deficit is effectively a timig issue. 20 For , the Departmet has aouced that it will require Primary Care Trusts to lodge reserves with Strategic Health Authorities, who will be expected to deliver overall balace across their regio. This will effectively allow Strategic Health Authorities to absorb the effect of the RAB regime ad allow time to achieve fiacial recovery. 21 A material deficit is defied as greater tha 0.5 per cet of total icome. 30 Fiacial Maagemet i the NHS

37 part three 18 Illustrative example of retaied ad cumulative surpluses ad deficits uder the RAB carry-forward regime Year 1 Year 2 Year 3 Year 4 Year 5 m m m m m Icome before RAB adjustmet RAB adjustmet to icome based o prior-year retaied surplus or deficit 0 (10) Icome after RAB adjustmet Expediture (110) (90) (90) (110) 100 Retaied Surplus/(deficit) for the year (10) Cumulative surplus/(deficit) brought forward 0 (10) (10) 0 0 Cumulative surplus/(deficit) carried forward (10) (10) Source: Natioal Audit Office 19 NHS Trusts with the largest cumulative deficits as at 31 March 2005 NHS Trust cumulative deficit as at Number of years of material Aticipated year 31 March 2005 cumulative deficit of recovery millio (icludig ) North Bristol (46.4) 4 To be agreed Mid Yorkshire Hospitals (40.7) Surrey ad Sussex Healthcare (35.5) 2 To be agreed Royal Uited Hospital Bath (27.7) 3 To be agreed Worcestershire Acute Hospitals (25.5) 4 To be agreed St George s Healthcare (23.6) Royal West Sussex (22.2) 4 Post Hammersmith Hospitals (18.4) 1 To be agreed Royal Wolverhampto Hospital (17.2) Uited Bristol Healthcare (17.2) 4 To be agreed Source: Departmet of Health data ad audited accouts of NHS Trusts Note NHS Trusts reportig a material cumulative deficit are cosidered to have breached their statutory break-eve duty takig oe year with aother oly if the deficit is ot recovered i the followig two years. If this is ot achieved, they must agree a recovery pla ad a aticipated date for recovery to secure a extesio to their break-eve period. Fiacial Maagemet i the NHS 31

38 part three 3.12 As at 31 March 2005, the total cumulative deficit across all NHS Trusts was 598 millio ( : 276 millio). Figure 19 shows the te NHS Trusts with the largest cumulative deficits, as well as the umber of successive years these Trusts have reported a material cumulative deficit. Their aticipated year of recovery, where this has bee agreed with the relevat Strategic Health Authority, is also show NHS Trusts with sigificat cumulative deficits will face cosiderable challeges to recover them. Clearig these deficits will require resources to be foud from somewhere withi the Departmet or NHS, ad hece if the bodies themselves do ot repay them, other fuds will have to be diverted away from their iteded recipiets. The Departmet therefore believes that these cumulative deficits should ot be writte off, sice this would provide o icetive for orgaisatios to retur to fiacial balace ad avoid deficits i future. They also believe it would ot be fair to take resources from oe part of the NHS to support overspedig orgaisatios i aother The Departmet should cosider the log-term implicatios of this stace. For a miority of bodies, it will ot be feasible to recover their cumulative deficits without some form of fiacial assistace from the Departmet. From , the Departmet plas to replace the brokerage system for NHS Trusts with a system of loas ad deposits ad this will eable those orgaisatios with sigificat cumulative deficits to remai solvet. However, the ability to demostrate a fiacially sustaiable positio withi three years is a key criterio for achievig NHS Foudatio Trust status. If the Departmet iteds ot to clear Trusts historic debt usig resources from elsewhere i the system, it will eed to cosider how these orgaisatios will reach the stadard required to achieve Foudatio Trust status. The Departmet should also cosider formulatig a detailed failure regime for NHS Trusts whose levels of debt mea they are o loger viable etities There is some evidece that the RAB regime ad its implicatios are ot curretly well uderstood withi the NHS. While curret fiacial difficulties i the NHS caot be ascribed solely to this, there is some evidece that local bodies would beefit from a clearer uderstadig of how the system operates ad its iteractio with atioal fudig mechaisms. We make recommedatios below to help address this. Primary Care Trusts 3.16 Like NHS Trusts, Primary Care Trusts are withi the Departmet s Resource Budgetig boudary, ad hece if a Primary Care Trust overspeds i a give fiacial year, its fudig is reduced the followig year for the reasos outlied above (paragraphs ). Ulike NHS Trusts, however, Primary Care Trusts spedig is dictated by a reveue resource limit, which is set o a aual basis by the Secretary of State for Health Ay oversped agaist a Primary Care Trust s reveue resource limit is recovered by reducig the reveue resource limit the followig year. However, the double deficit regime applied to Trusts, whereby the deficit is also posted to the balace sheet, does ot apply to Primary Care Trusts. This meas that cumulative figures such as those used to assess whether a Trust has broke eve takig oe year with aother are ot relevat to Primary Care Trusts. Istead, a Primary Care Trust that overspeds i a give year is immediately i breach of its statutory duty ad will receive a automatic regularity qualificatio i the audit report o its aual accouts, as well as a reductio to its subsequet reveue resource limit. Strategic Health Authorities 3.18 The regime for Strategic Health Authorities is similar to that for Primary Care Trusts, with bodies reportig a uder- or oversped agaist their reveue resource limit. Agai, ay oversped results i a automatic regularity qualificatio ad a reductio i future resources. However, the impact of ay oversped o local healthcare is far less sigificat, sice Strategic Health Authorities are ot resposible for providig or commissioig services. To date, overspeds by Strategic Health Authorities have bee extremely rare, with oly oe reported sice the creatio of Strategic Health Authorities i We recommed that the Departmet: provides detailed iformatio ad guidace to NHS Fiace Directors, Boards ad Audit Committees to esure that relevat stakeholders withi the NHS fully uderstad the RAB regime ad its implicatios for fiacial balace; reviews the curret arragemets for implemetig the RAB carry-forward regime, with particular emphasis o the icosistecy of its applicatio to local bodies ad the lack of trasparecy aroud adjustmets to icome i the followig year; ameds the NHS Mauals for Accouts to require NHS bodies to show separately as a ote to the accouts the icrease or reductio i icome as a result of the RAB carry-forward regime. This will allow users of the accouts to assess more accurately the i-year operatioal performace of the body, ad the effect of the prior-year RAB carry-forward o curret-year icome; 32 Fiacial Maagemet i the NHS

39 part three reviews the curret ad forecast cumulative positio of NHS Trusts uder existig fudig arragemets, ad cosiders formulatig a detailed failure regime for NHS Trusts whose levels of debt mea they are o loger viable etities. Why does a deficit matter? Maagig ad recoverig deficits ca have a far-reachig impact o NHS bodies, potetially affectig their ability to deliver services, meet bidig commitmets, maage major iitiatives ad achieve the criteria for Foudatio Trust status The techical processes outlied above are more tha a paper-based accoutig exercise. I the case of NHS Trusts ad Primary Care Trusts, they ca have a direct impact o a body s ability to deliver effective healthcare services ad meet key performace targets. Impact of cost cuttig o service delivery 3.20 Pressure to recover a deficit ad avoid breachig fiacial duties will mea NHS bodies are faced with difficult decisios, the results of which ca impact o service delivery. This ca iclude reducig capacity, for example through staff cuts, vacacy freezes or ward closures, or geeratig icome through o recurret measures such as property disposals. Such measures, while providig temporary relief to fiacial pressures, may well impact o the body s performace agaist other key targets, such as access to services ad waitig times Similarly, some Primary Care Trusts facig cost pressures ad potetial overspeds have chose ot to fud more costly procedures ad medicatios, leadig to regioal iequalities ad restrictig patiets access to potetially beeficial treatmets. For example, i November 2005, three East Suffolk Primary Care Trusts with a combied oversped of 20 millio 22 aouced that they would be withholdig access to some surgical procedures for patiets deemed to be cliically obese. Cash shortages 3.22 A sigificat deficit is likely to be accompaied by a shortage of cash, which will affect a body s ability to meet its fiacial commitmets. As Case Study 1 illustrates, a NHS body with a large uderlyig deficit ad cash shortage may have to cosider a rage of drastic measures to cotiue operatig Although a solutio was foud to the immediate pressures faced by Quee Elizabeth Hospital NHS Trust, a umber of other NHS bodies cosidered deferrig paymet of tax ad social security costs to HM Reveue & Customs i , with a hadful eve strugglig to pay staff wages. case study 1 Quee Elizabeth Hospital NHS Trust Quee Elizabeth Hospital NHS Trust reported a deficit of 9.2 millio i ad, as at September 2005, was forecastig a deficit of up to 19.7 millio for Although the Trust had previously bee able to secure sufficiet support to maage its cash positio util the year ed, its cash shortfall had steadily icreased, ad was expected to reach 47 millio by the ed of The Trust had a agreed temporary borrowig limit of 15 millio, origially due for repaymet o 9 November At 31 October 2005, the Trust had secured a oe moth extesio to the repaymet period but this meat that, uless a further extesio could be agreed, approximately 8 millio would have had to be repaid i December I assessig how this might be achieved, the Trust actively cosidered withholdig the followig paymets: Tax, Natioal Isurace, superauatio PFI parters Creditors 3 millio 2 millio 3 millio To avoid this drastic actio, the Trust ad its Board worked with the local Strategic Health Authority, who i cojuctio with the Departmet ad the NHS Bak (Aex 4) devised a cash support strategy to address the situatio. This meat that by February 2006 the Trust had secured sufficiet cash brokerage to repay its temporary borrowig ad meet its commitmets to creditors. Had this solutio ot bee reached, withholdig the 8m of paymets would have had sigificat cosequeces, some of which could have impacted o patiet care. For example: No-paymet of PFI parters could have resulted i the Secretary of State beig petitioed for paymet. There was a risk that the etire bod of 140 millio could have become payable; No-paymet of ivoices from drugs compaies ad other key suppliers could have resulted i future deliveries beig withheld; HM Reveue & Customs could have imposed fies for late paymet. Source: Appoited Auditor s Public Iterest Report (December 2005) ad Quee Elizabeth Hospital NHS Trust 22 I , Ipswich Primary Care Trust overspet by 10.1 millio, Suffolk Coastal Primary Care Trust by 6.2 millio ad Cetral Suffolk Primary Care Trust by 3.8 millio. Fiacial Maagemet i the NHS 33

40 part three 3.24 Such pressures are also reflected i NHS bodies performace agaist the Better Paymet Practice Code, which requires them to pay all valid o-nhs ivoices withi 30 days. O average, NHS Trusts with a deficit of over 5 millio paid oly 75 per cet of such ivoices withi 30 days some eight percetage poits below the atioal NHS average. 23 The NHS Trust with the highest retaied deficit i , Surrey ad Sussex Healthcare, paid oly seve per cet of bills by umber ad 28 per cet by amout withi 30 days These difficulties may lead to suppliers of goods ad services chargig iterest o outstadig balaces, or evetually withdrawig credit facilities altogether. For example, the Royal West Sussex NHS Trust has had to arrage paymet plas with a umber of its creditors, icludig a revised paymet schedule with the cotractors resposible for buildig its ew Chichester Treatmet Cetre. This paymet pla requires the Trust to pay iterest to the cotractor, thus icreasig the overall cost of the project. 25 Similarly, cotractors tederig for future work may icrease their prices to cover the risk of o-paymet, leadig to reduced value-for-moey o both capital projects ad operatig expediture. I , a total of 28 NHS bodies reported payig charges to suppliers uder the Late Paymet of Commercial Debts (Iterest) Act 1998, ragig from 1,000 to 40,000 ad totallig 90, Diversio of maagemet resources 3.26 Dealig with fiacial pressures ad the resultat corporate distress diverts resources away from ormal strategic ad operatioal priorities. If a body s maagemet are cocered chiefly with recoverig a deficit ad maagig its side-effects (such as poor creditor relatioships, see above), they may be uable to give sufficiet attetio to issues such as cliical performace or the forthcomig restructurig of the NHS (Part 5). Future NHS Foudatio Trust status 3.27 The importace of deficits is further heighteed by the fact that every NHS Trust is expected to be i a positio to apply for Foudatio status by I assessig applicat Trusts suitability for authorisatio, Moitor scrutiises their fiacial positio ad performace, focusig o cash ad workig capital maagemet, to idetify risks to future fiacial stability. Uder Moitor s assessmet criteria, NHS Trusts will eed to demostrate that they are able to tur historical deficits ito a substatial surplus ad maitai a reasoable cash positio. If they caot do so, they will ot be grated Foudatio Trust status. May NHS Trusts with large cumulative deficits will face sigificat challeges if they are to reverse these deficits withi the required timeframe. Causes of deficits The fiacial pressures cotributig to deficits are complex, ad ot always withi the cotrol of idividual bodies. However, some bodies maage these pressures better tha others NHS orgaisatios should have fiacial maagemet arragemets i place to esure their fiacial objectives are achieved. The fiacial plas produced by NHS bodies should reflect ay sigificat fiacial risks that they are exposed to, ad set out a strategy for dealig with them withi the resources likely to be available. The moitorig of budgets ad the idetificatio of variaces should eable NHS bodies to take ay corrective actio required to retur to fiacial balace I the past, some NHS bodies have implemeted short-term, oe-off measures to achieve recurret fiacial balace, ofte wholly through accoutig adjustmets rather tha operatioal chages or actios (Part 4). The impact of this is twofold: firstly, it oly serves to defer fiacial problems to subsequet years rather tha dealig with them as they arise; secodly, it creates ad reiforces the perceptio that fiacial difficulties are the resposibility of the fiace departmet, who will always geerate solutios I , appoited auditors reported that the issues which caused fiacial pressures ad left some NHS bodies uable to maage withi their curret resources icluded: implemetatio of workforce cotracts (the ew cotract for cosultats, Ageda for Chage ad the ew GMS cotract 27 ); 23 Source: Natioal Audit Office aalysis of NHS Trust performace data ad idividual accouts. 24 Source: Ibid. 25 The additioal cost to the Trust of deferrig paymet of a sigle ivoice for three moths was 17,250. Source: Audit Commissio Public Iterest Report, Jue 2005 ad Royal West Sussex NHS Trust. 26 Strategic Health Authorities icurred 1,000 i iterest charges, NHS Trusts 70,000 i iterest charges ad Primary Care Trusts 18,000 i iterest charges ad 1,000 compesatio for debt recovery. Source: Natioal Audit Office aalysis of NHS summarised accout data. 27 The Departmet has estimated that i the Cosultats Cotract cost 90 millio more tha aticipated, ad that the Geeral Medical Services Cotract (see paragraphs 4.42f.) exceeded their forecast by a further 300 millio. Source: Ucorrected trascript of oral evidece, HC 736-I, Public Expediture o Health ad Persoal Social Services 2005, Health Select Committee, 1 December Subsequet aalysis by the Departmet suggests a slightly smaller shortfall of 284 millio o the GMS Cotract. 34 Fiacial Maagemet i the NHS

41 part three additioal activity some NHS Trusts reported udertakig additioal activity over ad above that specified i cotracts, for which they did ot receive additioal icome. Primary Care Trusts also reported icreased costs as a result of over-performace; the requiremet to meet waitig-time ad other access targets some NHS orgaisatios have made achievig or ideed exceedig access targets a higher priority tha fiacial balace; ad urealistic savigs targets ad efficiecy programmes which have ot bee delivered Whilst factors such as these may place greater demads o fiacial maagemet, idividual NHS bodies should ordiarily be able to maage a reasoable level of uforesee cost pressures. This ability is a basic elemet of good fiacial maagemet, reflectig orgaisatioal agility ad resposiveess to chagig circumstaces. Ad while there are exteral reasos why NHS orgaisatios caot always exercise complete cotrol over their activities, they all operate i the same eviromet ad are subject to the same or similar cost pressures. Give this, the scale of variatio i fiacial performace implies that some NHS bodies have fiacial maagemet ad goverace arragemets which mea that, whe faced with fiacial pressures like those idetified above, they have coped better tha others. Fiacial recovery plas Robust fiacial recovery plas are a vital elemet of returig to fiacial balace. While most bodies with large deficits have a recovery pla, a sigificat umber are ot deliverig all elemets of their plas i practice. Ad while some bodies fiacial recovery plas have bee successfully desiged ad delivered, others have bee based o urealistic assumptios or short-term measures I health bodies where fiacial stadig is a cause for cocer, fiacial recovery plas (also kow as turaroud plas ) are a essetial part of a overall strategy directed towards achievig recurret fiacial balace. The aim of a fiacial recovery pla is to demostrate a well structured, well plaed ad practical way forward that ca achieve fiacial stability ad sustaiability. 28 Fiacial recovery plas ca cotai a programme of activities aimed at fiacial recovery, ad whilst these ted to be focused o the idividual body cocered, actio may also be required at the health ecoomy level NHS bodies i deficit may eed to cosider redesigig or recofigurig services to achieve recurret fiacial balace (Case Study 3). However, this teds oly to occur where a robust recovery pla has bee produced which uderpis the redesig process Auditors assessed whether health bodies who had a year-ed deficit positio i had idetified ad uderstood the uderlyig causes of the deficit. Figure 20 overleaf shows that the vast majority of both NHS Trusts ad Primary Care Trusts have plas i place to address the uderlyig causes of the deficit. However, a sigificat proportio of these bodies with plas (86 per cet for Primary Care Trusts, 79 per cet for NHS Trusts) are ot deliverig all the elemets of their plas i practice. I auditors opiios, two per cet of Primary Care Trusts ad four per cet of NHS Trusts had ot idetified the causes of the deficit ad had ot yet developed a pla to retur to fiacial balace Whe reviewig fiacial recovery plas auditors have reported a umber of frequetly occurrig weakesses icludig: Fiacial recovery plas are ofte viewed solely as the resposibility of the fiace director ad the fiace departmet. If a fiacial recovery pla is to be successful it must be fully supported by the Board ad seior maagemet throughout the orgaisatio. Some fiacial recovery plas do ot attempt to address the uderlyig fiacial problems, but istead aim to put i place short-term, o-recurret measures that will leave uderlyig problems uaddressed. Fiacial recovery plas ofte iclude urealistic assumptios ad uidetified or overly ambitious savigs schemes. Fiacial recovery plas are ot always agreed with stakeholders. It is rare that a orgaisatio ca take the ecessary recovery actio without the support of key stakeholders. Fiacial recovery plas are ot see as live documets; orgaisatios may fail to update them to take accout of chaged circumstaces, or moitor progress agaist the pla ad the eed for ay corrective actio Figure 21 overleaf sets out some key questios that NHS bodies should cosider whe developig a fiacial recovery pla. 28 Healthcare Fiacial Maagemet Associatio, Fiacial Recovery Plas i the NHS (2005). Fiacial Maagemet i the NHS 35

42 part three 20 Proportio of Primary Care Trusts ad NHS Trusts which had idetified ad uderstood the uderlyig causes of their deficit ad put plas i place to address them Primary Care Trusts Based o 90 Primary Care Trusts which icurred deficits i NHS Trusts Based o 68 NHS Trusts which icurred deficits i % 2% 4% 21% 85% 75% The audited body has ot idetified the causes ad o pla is i place There is a pla i place to address the uderlyig causes but ot all elemets are beig delivered i practice There is a comprehesive pla i place that is provig to be delivered i practice Source: Audit Commissio 21 Questios for NHS bodies to cosider whe developig fiacial recovery plas NHS bodies, either idividually or collectively (at health ecoomy level), should cosider the followig questios i developig fiacial recovery plas: Havig idetified a potetial deficit or icurred a deficit i previous years, has the orgaisatio produced a recovery pla based o realistic assumptios? Does the recovery pla iclude proposals to recover historic deficits as well as i-year overspedig? Does the recovery pla take ito accout the impact of double deficits? Does the recovery pla differetiate betwee recurret ad o-recurret icome ad expediture? What elemets of the recovery pla are o-recurret? What cost aalyses have bee udertake to ascertai the mai causes for the deficit? Does the recovery pla address these causes? What are the assumptios uderlyig the recovery pla? Are these assumptios realistic ad do they take accout of atioal ad local developmets? Has the recovery pla bee developed by all the orgaisatios withi the health ecoomy, with iput from budget holders? Is the recovery pla uderstood ad supported by all the orgaisatios, maagers ad cliicias across the health ecoomy? Is the recovery pla fully itegrated ito operatioal plas? Does the recovery pla set out resposibilities ad timescales? Has a Fiacial Recovery Board bee coveed to oversee the developmet of the pla ad its implemetatio? Does the recovery pla achieve recurret fiacial balace withi the three to five-year recovery period agreed with the Strategic Health Authority? What risk assessmet ad sesitivity aalysis has bee udertake to assess the robustess of the recovery pla ad the key spedig ad savigs plas it cotais? Is progress i deliverig the recovery pla regularly reported to the Board? Is the recovery pla regularly updated to reflect chages i circumstaces? Source: Audit Commissio 36 Fiacial Maagemet i the NHS

43 part three 3.37 Recovery plas may eed to iclude o-recurret measures such as asset disposals to tackle cumulative deficits ad relieve immediate pressures. However, these should be see as a temporary meas of maitaiig service provisio ad returig to balace whilst more recurret savigs are idetified ad implemeted. Case Study 2 o Newcastle, North Tyeside ad Northumberlad Metal Health NHS Trust shows how a phased recovery pla ca comprise a combiatio of orecurret measures to reverse a cumulative deficit ad loger-term restructurig ad cost-savigs programmes to deliver recurret fiacial balace. Case study 2 Newcastle, North Tyeside ad Northumberlad Metal Health NHS Trust I the year edig 31 March 2003, Newcastle, North Tyeside ad Northumberlad Metal Health NHS Trust reported a deficit of 1.9 millio. I respose to the fiacial positio, the Trust developed a comprehesive four-year Recovery Pla, which aimed to brig the Trust to a recurrig break-eve positio ad to recover the deficit by The pla was developed collaboratively with commissioers ad supported by the Strategic Health Authority. I the year eded 31 March 2004 the Trust reported a i-year surplus of 0.3 millio ad i the year eded 31 March 2005 the Trust reported a i-year surplus of 1.7 millio. This meat that the Trust had recovered the deficit two years earlier tha plaed. A phased approach was take to deliverig recurrig savigs to esure the cotiuatio of effective service provisio. This was achieved by esurig the Recovery Pla took accout of the phasig ad icluded o-recurret measures to bridge the gap. This allowed the Trust to achieve break-eve ad to recover the deficit while the recurrig chages were beig implemeted. Key compoets of the Recovery Pla ca be described i two parts: 1 Recovery of uderlyig deficit ( 1.9 millio) This was delivered through a combiatio of o-recurret measures, icludig: Surplus o lad sale; Plaed slippage o developmets programme; Strategic Health Authority support. 2 Recurrig fiacial stability, esurig cotiuatio of service withi budget For this, the Trust iitially idetified a target of 2.7 millio, although this was the reviewed aually ad formed part of the cotiuig fiacial strategy. This was achieved through a combiatio of the followig: Agreed additioal oe per cet ivestmet from commissioers ( 0.1 millio); Re-desig of services ad revisio of care pathways, which facilitated the developmet of specialist teams ad ward closures i both Adult ad Older Peoples Services ( 2 millio); Developmet of a strategy for o-payroll expediture ( 0.6 millio). Key features of how the Trust achieved its Recovery Pla iclude the followig: Strog moitorig of the Recovery Pla ad ay other proposed savigs by the Fiacial Recovery Group. Strog maagemet buy-i ad owership throughout the idividual services of the Trust. Establishmet of a No-Pay Strategy Group whose remit is to review all o-payroll expediture ad idetify savigs ad efficiecies. Iitiatives i the Recovery Pla were clearly laid out with targets timetabled. Workig i partership with the Strategic Health Authority ad Commissioers to maage the fiacial positio across the patch. Quality improvemets made to patiet services through re-egieerig. Sped to save recogitio withi the Trust that ivestmet eeded to be put ito some services to realise log-term savigs i others. Whilst the Trust has recovered its deficit, it is cotiuig to address its cost base, recogisig the eed for forward plaig ad assessmet of future risks. The Trust has ow developed a three year rollig fiacial strategy ad has put measures i place to achieve future efficiecies with a aim to sustaiig a fiacially viable service. Source: Audit Commissio Appoited Auditors/Natioal Audit Office Fiacial Maagemet i the NHS 37

44 part three Service recofiguratio ad efficiecy savigs 3.38 I seekig to idetify ways of deliverig recurret savigs ad fiacial balace, NHS bodies should cosider the NHS Moderisatio Agecy s 10 High Impact Chages (Figure 22), full details of which are available o the Agecy s website. 29 These iitiatives have bee show to promote efficiet use of resources ad effective cofiguratio of care pathways ad services, all of which ca geerate positive fiacial outcomes. NHS bodies recovery plas should therefore seek to realise efficiecy savigs i all relevat areas from the Agecy s list Case Study 3 o Hammersmith ad Fulham Primary Care Trust illustrates how a body has redesiged care pathways ad implemeted sigificat cost savigs as part of a successful recovery pla. 22 NHS Moderisatio Agecy s 10 High Impact Chages 1 Treat day surgery as the orm for elective surgery 2 Improve access to key diagostic tests 3 Maage variatio i patiet discharge 4 Maage variatio i patiet admissio 5 Avoid uecessary follow-ups 6 Icrease the reliability of performig therapeutic itervetios through a Care Budle approach 7 Apply a systematic approach to care for people with log-term coditios 8 Improve patiet access by reducig the umber of queues 9 Optimise patiet flow usig process templates 10 Redesig ad exted roles Case study 3 Hammersmith ad Fulham Primary Care Trust As outlied i our last report, 1 Hammersmith ad Fulham Primary Care Trust icurred a 8.5 millio oversped i , ad was facig a potetial deficit of 19 millio (almost oe teth of its aual budget) i Followig a Public Iterest Report issued i December 2004, the Primary Care Trust developed a recovery pla which icluded 14.5 millio of plaed support from the Strategic Health Authority, some of which was recurret ad some o-recurret. Necessary actios idetified i the Public Iterest Report icluded: review the robustess of the recovery pla o a ogoig basis ad take timely actio to address emergig fiacial pressures ad plaed savigs that are ot realised; develop ad implemet rigorous systems of iteral fiacial cotrol which esure that performace agaist budget is reported accurately ad cotrolled effectively; develop a rigorous approach to medium ad loger-term fiacial plaig that balaces service-delivery objectives with the duty to achieve fiacial break-eve; ad cotiue to build the capacity of the Primary Care Trust, i particular the fiace departmet, to esure that the fiacial affairs of the orgaisatio are maaged effectively ad efficietly. The Primary Care Trust has made cosiderable progress sice the Public Iterest Report. It exceeded the target i its agreed recovery pla i , achievig a small surplus of 679,000. It expects to meet its fiacial targets agai i , which iclude deliverig a further cost savigs programme of 4.3 millio ad makig a plaed surplus of 700,000. The Primary Care Trust s strategy for achievig this has bee to combie both: Sustaiable chages to its cost base to support its service strategy; ad Substatial improvemets i its fiacial cotrol systems. Source: NHS Moderisatio Agecy Source: Appoited Auditors/Hammersmith ad Fulham Primary Care Trust/ Natioal Audit Office NOTE 1 Fiacial Maagemet i the NHS NHS (Eglad) Summarised Accouts , p Fiacial Maagemet i the NHS

45 part three Cost base I , the Primary Care Trust re-examied its whole cost base ad made sustaiable savigs i a umber of areas. A substatial part of the sustaiable savigs i the cost base have bee realised as a result of the Primary Care Trust s service strategy to shift work from secodary to primary care. This strategy is desiged both to beefit patiets ad to brig sigificat fiacial savigs. To date, savigs have bee achieved through, for example: Treatig idetified patiet groups i GP surgeries or commuity cliics istead of i acute hospitals; Settig up a GP referral pael to review all referrals from oe hospital cosultat to aother, ad determie if patiets would best be referred back to their GP rather tha beig see by aother hospital cosultat. The Primary Care Trust is cotiuig to develop this service strategy ad is usig its approach to practice-based commissioig (Part 5) to ecourage all cliicias doctors, urses ad therapists to treat more patiets i primary care where this would be cliically ad fiacially beeficial. The aim is to set up virtuous circles i which carefully targeted ivestmet leads to savigs which i tur ca provide ew ivestmet. Fiacial cotrol systems Sustaiable reductios i the cost base have bee supported by improvemets i iteral fiacial cotrols. The Fiacial Cotrol Actio Pla, agreed ad moitored by the Audit Committee, has bee the mai tool to prioritise ad moitor implemetatio of improvemets i fiacial cotrol systems. The Actio Pla covered a rage of fudametal requiremets for good fiacial cotrol such as: Recruitmet of permaet fiace departmet staff; Esurig clear owership of all budgets ad idetifyig ad moitorig key cost drivers; A ew Actio Pla was agreed with the Audit Committee for which covered: The developmet of traiig guides ad traiig courses for budget holders; Regular moitorig of key fiacial cotrol measures such as the speed of paymet of creditors ad receipt of debts. I additio, the Primary Care Trust has trasferred resposibility for egotiatig cotracts ad moitorig service level agreemets ad Foudatio Trust cotracts from the Commissioig to the Fiace Departmet. I this ew role the fiace departmet is improvig: The clarity of the fiace ad activity arragemets for each service level agreemet; The speed ad accuracy of reportig from the acute Trusts; The robustess of the procedures for agreeig activity ivoices. Buildig fiace capability Fiace capacity has bee built with a umber of chages sice December The Fiace Departmet has ow bee stregtheed to a permaet complemet of 12 staff, with ie qualified fiace professioals ad three uder traiig. Most recetly the departmet has bee reorgaised to: Focus more seior support o the commissioig fiace area, which accouts for 75 per cet of the Primary Care Trust s ow expediture, ad is resposible for the lead commissioig arragemets with the Hammersmith Hospitals NHS Trust (which accouts for early 200 millio expediture across the North West Lodo sector); Support the implemetatio of practice-based commissioig ad the developmet of a more busiess-like approach to the services directly provided by the Primary Care Trust. The fiacial climate still provides challeges for the Primary Care Trust. However, the Primary Care Trust believes that it is layig a firm foudatio to meet these challeges. Improvig accuracy of expediture codig, ad the timeliess ad completeess of icome ad expediture reportig; Improvig the completeess of recordig of ivoices received ad the speed of resolvig disputes i relatio to ivoices receivable or payable; Esurig that all billable icome has bee ivoiced. Fiacial Maagemet i the NHS 39

46 part three Role of Boards ad maagemet reportig NHS Boards remai key players i deliverig fiacial recovery ad recurret balace. They require expertise i both fiace ad healthcare, as well as robust maagemet iformatio o which to base decisio makig. This iformatio should be based o itegrated fiacial ad activity data, geerated by fully traied iformatio teams Our previous report made detailed recommedatios about the role of NHS Boards i drivig improvemets i fiacial maagemet, 30 ad these recommedatios remai valid for bodies seekig to restore ad sustai fiacial balace. I particular, it is essetial that the Board take collective owership of fiacial issues ad are provided with clear ad robust fiacial iformatio o which to base decisio-makig This iformatio should ecompass the balace sheet positio as well as icome ad expediture, icludig details of material itra-nhs balaces. The Board should seek explaatio ad clarificatio of ay disputed items or delays i sigig service level agreemets Cash flow figures should also be icluded, showig both year-to-date ad forecast positio. As outlied i paragraphs , cash pressures are the biggest threat to may bodies cotiued operatio, with may takig belated ad drastic measures to maage the year-ed positio. Ideed, it is ot oly NHS orgaisatios with a i-year deficit that experiece cash shortages; a body reportig a relatively healthy icome ad expediture positio ca also be short of cash if it has a uderlyig deficit, or has reported a deficit i previous years. Effective forecastig of cash flow alogside accruals allows cash shortfalls to be idetified earlier i the year, ad corrective actio take to mitigate their impact The effectiveess of all such fiacial iformatio is greatly ehaced if it is liked to activity data. Uder Paymet by Results, which creates a much closer lik betwee activity ad fudig, it is eve more vital to itegrate fiace, activity ad resource data, icludig sesitivity aalysis where appropriate. This will require ot oly effective maagemet accoutig processes, but also robust systems for idetificatio, codig ad recordig of activity. Possible methods of improvig ad itegratig these systems iclude: Providig more detailed guidelies ad traiig to iformatio staff such as cliical codig teams. Esurig cliical ad iformatio staff are aware that the way they record activity has a direct impact o fiaces, ad hece ultimately o future service provisio Case Study 4 o Bradford Teachig Hospitals NHS Foudatio Trust illustrates how ew Board appoitmets ad improved maagemet reportig have helped the orgaisatio recover from a serious deficit Our previous report highlighted the importace of o-executive directors providig the Board with additioal fiacial ad busiess expertise, appropriate challege ad a idepedet view. I additio to the recommedatios made previously, it should be oted that o-executive directors draw from outside the health sector ca fulfil this role effectively oly if they are properly briefed about relevat NHS issues ad iitiatives. Each body should aim to maximise ot just the level of fiacial acume amogst its o-executives, but also their kowledge of curret cliical, operatioal ad fiacial issues withi the NHS. Bodies must regularly assess the backgroud ad experiece of all their o executive directors, ad assess whether additioal briefigs ad traiig sessios are required to maximise their effectiveess i the specific cotext of the NHS. To improve the effectiveess of Boards ad maagemet reportig, NHS Bodies must: review all recommedatios made i our previous report regardig Boards ad maagemet reportig, ad esure that these have bee implemeted; esure that maagemet reports ad forecasts preseted to Boards effectively itegrate fiacial ad activity data, eablig a rouded assessmet of performace to be made; review at least aually the backgroud, cotributio ad experiece of all their o executive directors, ad assess whether additioal briefigs ad traiig sessios are required to maximise their effectiveess i the specific cotext of the NHS. 30 Fiacial Maagemet i the NHS NHS (Eglad) Summarised Accouts , p Fiacial Maagemet i the NHS

47 part three Case study 4 Bradford Teachig Hospitals NHS Foudatio Trust As outlied i our previous report, Bradford Teachig Hospitals NHS Foudatio Trust was oe of the first wave of NHS Trusts to be authorised o 1 April By November 2004, it was forecastig a deficit of 11.3 millio for the year edig 31 March 2005, compared with a budgeted surplus of 2.3 millio. Moitor iterveed i October 2004 to appoit exteral advisers to review the fiacial positio of Bradford Teachig Hospitals ad make recommedatios for remedial actio. Moitor also cosulted extesively with the Trust s Board ad Seior Maagemet Team ad cosidered their resposes. After reviewig the resultig evidece, Moitor determied that it still had serious cocers. Moitor therefore iterveed agai i December 2004 to remove the Chairma ad appoit a ew Chairma o a iterim basis. This chage was accompaied by cocerted actio to address the Trust s fiacial positio, improve relatios with the local health commuity ad properly adjust to the cultural ad orgaisatioal challeges of beig a NHS Foudatio Trust. Specific measures take by the Trust icluded: improvig the quality ad timeliess of maagemet reportig to eable earlier itervetio; improvig cliical codig; stregtheig the Board through the permaet appoitmet of a ew Chairma, Chief Executive ad Chief Fiacial Officer. The fial fiacial positio for was a 8 millio deficit (some 3.3 millio lower tha forecast), while the Trust s uaudited year-ed out-tur for shows a further reductio i its deficit, to 2.8 millio (after restructurig costs). Furthermore the ew team has istigated a more fudametal review of its operatios to uderpi the fiacial stregth of the Trust for the loger term. The experiece of Bradford has further uderlied the importace of NHS Boards uderstadig that they are fully accoutable for the performace of their orgaisatio. It has also emphasised the beefits of robust ad timely maagemet reportig, particularly i idetifyig, discussig ad respodig to cost pressures such as Paymet by Results. Source: Natioal Audit Office/Moitor/Bradford Teachig Hospitals Foudatio Trust Operatig ad Fiacial Review Orgaisatio-wide approach to fiacial balace To meet the challeges with which they are curretly faced, NHS bodies eed to take a orgaisatio-wide approach to fiacial maagemet. Deliverig fiacial balace must ot be see as a task for the fiace departmet aloe As a umber of our case studies reflect, NHS orgaisatios deliverig or returig to fiacial balace ofte cite a orgaisatio-wide approach as a key elemet of their success. This reflects the geeral priciple outlied i our previous report, 31 that deliverig fiacial balace must be see as a collective resposibility rather tha the remit of the Fiace Director aloe This more holistic approach to fiacial balace requires buy-i from a wide rage of idividuals across the orgaisatio. Not just fiace leads, but also seior cliicias ad maagers should be alive to ew developmets i their field which may impact o a body s fiaces. Cliicias ad maagers should work with specialist fiace staff to quatify this impact, cosider optios ad develop strategies to maage it. Some bodies have doe so successfully by assigig a amed qualified maagemet accoutat to each Operatioal Director. Although this may require icreased expediture to expad fiace capacity, a umber of bodies recoverig or maitaiig fiacial balace (for example Suderlad Teachig Primary Care Trust (Case Study 5 overleaf) ad Hammersmith ad Fulham Primary Care Trust (Case Study 3) cite a larger pool of qualified fiace staff as a key elemet of their success For bodies strivig to recover balace, this close co-operatio is vital to idetify savigs ad improve fiacial cotrol. The creatio of a dedicated fiacial recovery group, drawig o idividuals from across the orgaisatio rather tha the fiace fuctio aloe, ca help to make recovery a key corporate priority ad ecourage a sese of wider owership. Some bodies have also beefited from formig sub-groups to focus o specific areas of activity (such as o-pay expediture, see Case Study 2). 31 Fiacial Maagemet i the NHS NHS (Eglad) Summarised Accouts , p. 33. Fiacial Maagemet i the NHS 41

48 part three case study 5 Suderlad Teachig Primary Care Trust Suderlad Teachig Primary Care Trust has met all its fiacial targets every year sice it was created i The Trust serves a populatio of 283,000 ad i spet over 375 millio. I , the Healthcare Commissio rated it a three star Primary Care Trust for the secod year ruig. The Audit Commissio stated i its aual audit letter that the Primary Care Trust cotiues to maage its fiaces well. The Primary Care Trust idetifies a umber of factors i its successful track record of fiacial maagemet: Fiace is ot cosidered a issue for the Director of Fiace aloe. The Board ows the orgaisatio s fiacial ageda; The Primary Care Trust has a experieced ad stable Board. There are good-quality staff throughout the orgaisatio, with qualified fiace staff for idetified posts; There is a proactive, orgaisatio-wide approach to fiacial maagemet. The Primary Care Trust uses short-, medium- ad log-term scaig to idetify ad head off potetial difficulties. Fiace ad o-fiace staff are ecouraged to idetify ad raise issues, which stay o the ageda util they are resolved; The Primary Care Trust aims to be realistic. It forecasts the year-ed positio it expects but recogises ad quatifies the risks; A high priority is give to fiace professioalism. This applies to fiacial maagemet but equally to fiacial reportig, with the appoited auditors commetig: As i previous years the PCT provided high-quality accouts with excellet supportig workig papers. The Primary Care Trust has a philosophy of cooperatio ad partership workig. The toe is set by the Chief Executive ad reiforced i all key Trust documets, for example i aual plas, aual reports ad cotracts with NHS Foudatio Trust providers. Source: Audit Commissio Appoited Auditors/Natioal Audit Office 3.49 All directorates withi the orgaisatio eed to be aware of their resposibility for exercisig fiacial cotrol. For example, Huma Resources should oly authorise ew posts i cosultatio with Fiace, ad with due regard to the body s authorised establishmet. Similarly, iformatio staff such as codig teams should be aware of the vital role of accurate activity data i fiacial maagemet (see also paragraph 3.43), particularly with the roll-out of Paymet by Results. Operatioal Directors, too, should cosider all possible optios before authorisig potetially costly measures such as locum requisitios Idividual budget-holders have a key role to play i deliverig fiacial balace, ad it is vital that they are both made aware of this resposibility ad equipped with the guidace ad traiig to fulfil it. We make recommedatios below aimed at improvig fiacial awareess ad cotrol amogst budget holders ad maximisig their cotributio to fiacial balace Case Study 5 o Suderlad Teachig Primary Care Trust shows how a orgaisatio has implemeted some of the approaches outlied above, icludig wider owership of the fiace ageda ad robust fiacial reportig, to deliver ogoig fiacial balace. To help promote a orgaisatio-wide approach to fiacial maagemet, NHS bodies must: Esure that there is clear accoutability ad owership for all budgets (see Case Study 3). Assess whether budget-holders have the ecessary skills ad support for maagig budgets, ad address ay gaps idetified through appropriate traiig. This should be supported by a budget maual which is regularly updated ad approved by seior maagemet (see Case Study 3). Esure that aual budgets are agreed, siged by budget holders ad the Director of Fiace, ad approved by the Board at the start of the year. Related Local Delivery Plas ad service level agreemets should also be agreed, siged ad reported to the Board by the start of the year. Budgets ca oly be approved with ay certaity if the related Local Delivery Plas ad service level agreemets have also bee agreed, ad hece the large proportio of NHS bodies curretly failig to do so (79 per cet of NHS Trusts ad 83 per cet of Primary Care Trusts i ) is a cocer (see Part 4). Review the skills ad experiece of staff resposible for preparig ad assessig busiess cases, ad where ecessary esure that they receive appropriate traiig i ivestmet appraisal, costig, modellig ad sesitivity aalysis. Esure that all maagers resposible for deliverig specific iitiatives to time ad budget have received appropriate traiig i project maagemet, ad that such support ad skills are made available to all project teams. 42 Fiacial Maagemet i the NHS

49 part three Review, ad where ecessary improve, orgaisatioal arragemets to promote costructive, ogoig dialogue betwee budget-holders (particularly cliical staff) ad specialist fiace staff. This should allow resultat queries to be aswered quickly, ad issues impactig o budgeted performace to be raised ad resolved as early as possible. Provide staff resposible for idetificatio, codig ad recordig of activity with detailed guidelies, traiig ad other support to allow them to produce data ad iformatio that is fit-for-purpose. Esure that cliical ad iformatio staff are aware that the way they record activity has a direct impact o fiaces, ad hece ultimately o future service provisio. The performace of these staff should be moitored, costructive feedback provided ad corrective actio take where ecessary. Cosider whether icreasig specialist fiace capacity might deliver wider beefits i the orgaisatio, for example by assigig a amed qualified maagemet accoutat to each Operatioal Director. Curret developmets 3.52 I late Jue 2005, the Secretary of State ad NHS Chief Executive wrote to the Chairs ad Chief Executives of all NHS bodies i deficit, remidig them of their resposibility to deliver fiacial balace. I December 2005, the Departmet cotracted turaroud teams to review 98 NHS bodies idetified as facig particular fiacial difficulties. 102 statutory orgaisatios were covered by this exercise, but where joit maagemet arragemets are i place they are treated as oe for the purpose of this work. These teams, which cosisted of exteral cosultats, reviewed the bodies fiacial positio ad produced prelimiary reports o what actio could be take to assist recovery The Departmet tells us that 25 of the 26 bodies deemed to be at particular risk ow have turaroud support o the groud to help improve efficiecy ad cut costs, while the remaiig oe has a clearly defied timetable for securig this support. A further 37 bodies are expected by the Departmet to esure that they secure additioal expertise to deliver fiacial turaroud. Of these 37, the Departmet tells us that 32 ow have appropriate support o the groud All of the 98 orgaisatios have produced recovery plas to deliver recurret fiacial balace, ad these are curretly beig reviewed by Strategic Health Authority area Turaroud Directors ad maagemet teams, prior to beig released to the Natioal Programme Office. The Natioal Programme Office is iteded to provide a idepedet ad qualified view as to whether turaroud plas are viable, quatifiable ad - critically that implemetatio traslates ito improved fiacial results. As at 23 May 2006, the Natioal Programme Office had formally received 11 plas from orgaisatios withi the Turaroud cohort. The Departmet expects the majority of plas to be received by mid-jue We welcome the Departmet s efforts both to reaffirm local-level resposibility for fiacial balace, ad to idetify ad address the challeges facig local bodies. The work of turaroud teams has the potetial to geerate detailed good practice applicable to the wider NHS ad we recommed that ay lessos leared are dissemiated to all NHS bodies as soo as possible. We recommed that the Departmet reviews the fidigs of the turaroud teams cotracted to udertake detailed work at a umber of orgaisatios i 2006, ad dissemiates the key lessos to all NHS bodies as soo as possible The Departmet is rollig out chages to the NHS fiacial regime for to address existig cocers aroud fiacial support ad to clarify the positio o the RAB carry forward regime. The Departmet has stated that key elemets will iclude a ed to fiacial support for overspedig bodies ad a ew system of loas ad deposits to replace the curret system of cash brokerage (see paragraph 2.26) A further feature of the ew strategy is that NHS bodies will be ecouraged to pla ad budget for a surplus rather tha break-eve. This will represet a cultural chage for the NHS, ad we support the Departmet i ecouragig more prudet fiacial plaig, particularly give the icreased risks brought by Paymet by Results (paragraphs ) We await with iterest further details of the Departmet s fiacial strategy, ad will cosider its implicatios ad implemetatio as part of our future work o NHS fiacial maagemet. Fiacial Maagemet i the NHS 43

50 part four Part FOUR Audit of the NHS accouts 44 Fiacial Maagemet i the NHS

51 part four 4.1 This part summarises appoited auditors views o the fiacial maagemet issues arisig from the audits. The iformatio has bee gathered from audit opiios, audit reports ad from a questioaire auditors are required to complete for every Strategic Health Authority, Primary Care Trust ad NHS Trust. For NHS Foudatio Trusts, the iformatio is draw from the Comptroller ad Auditor Geeral s audit of the cosolidated accouts of NHS Foudatio Trusts, as well as a fiacial review produced by Moitor. 32 This part of the report also highlights some of the key fiacial issues that arose durig Audit reportig I auditors gave uqualified audit opiios o the truth ad fairess of all Strategic Health Authorities, Primary Care Trusts, NHS Trusts ad NHS Foudatio Trusts. Auditors qualified their opiios o the regularity of expediture at 92 Primary Care Trusts ad oe Strategic Health Authority. Sice our last report, auditors have issued 29 Public Iterest Reports, highlightig cocers over fiacial stadig i three Strategic Health Authority areas, 14 NHS Trusts ad 19 Primary Care Trusts. Despite the audit timetable beig uchaged, appoited auditors reported a disappoitig declie i the quality of accouts preseted for audit. Audit opiios o the accouts 4.2 Auditors are required to issue a opiio as to whether a body s accouts show a true ad fair view of its state of affairs as at the year ed ad of its et resources or icome ad expediture for the year. Where auditors decide that a body s aual accouts are likely to mislead people about its fiacial performace or positio, they give a qualified opiio o those accouts, drawig attetio to their cocers. 4.3 I there were o qualificatios of the accouts of Strategic Health Authorities, Primary Care Trusts, NHS Trusts or NHS Foudatio Trusts o the grouds of truth ad fairess. The Comptroller ad Auditor Geeral was therefore able to give a uqualified opiio o the truth ad fairess of the summarised accouts of Strategic Health Authorities, Primary Care Trusts, NHS Trusts, ad o the cosolidated accout of NHS Foudatio Trusts. 4.4 Auditors are required to give a regularity opiio o Primary Care Trust ad Strategic Health Authority accouts which cofirms whether i their view i all material respects, the expediture ad icome have bee applied to the purposes iteded by Parliamet ad the fiacial trasactios coform to the authorities which gover them. I , auditors qualified the regularity opiio of oe Strategic Health Authority ad 92 Primary Care Trusts. Figure 23 overleaf shows the breakdow of the causes of qualificatio. The Strategic Health Authority qualificatio related to a breach of the reveue resource limit. The qualificatios o Primary Care Trusts accouts cosisted 32 Review ad Cosolidated Accouts of NHS Foudatio Trusts , HC 622, 22 November 2005, pp Fiacial Maagemet i the NHS 45

52 part four of 83 breaches of reveue resource limits, oe breach of a capital resource limit ad two accouts qualified for both capital ad reveue resource limit breaches. The remaiig six Primary Care Trust qualificatios related to irregular expediture, five of these also beig qualified for breaches of reveue resource limits. 4.5 Oe of the qualificatios for irregular expediture related to possible ulawful paymets, ad the remaiig five occurred because of problems with the goverace arragemets of oe partership etered ito uder the Health Act 1999 betwee local authorities ad NHS bodies. The Act icludes a provisio for parters to cotribute resources to a pooled budget, which is the used to fud the partership s agreed aims. 4.6 Failure to keep expediture withi agreed resource limits is a breach of a statutory fiacial duty, ad hece should result i a automatic qualificatio of the regularity opiio for the idividual bodies cocered. However, the Comptroller ad Auditor Geeral did ot qualify his opiio o the summarised accouts of Primary Care Trusts sice there are o overall resource limits for the aggregate expediture of these orgaisatios, ad hece o breach of a statutory fiacial duty. 4.7 The Comptroller ad Auditor Geeral also gave a uqualified regularity opiio o the summarised accouts of the Strategic Health Authorities. He did ot give a regularity opiio for the summarised accouts of NHS Trusts or the cosolidated accouts of NHS Foudatio Trusts, sice auditors are ot required to report the regularity of these bodies expediture. Public Reportig 4.8 The Audit Commissio Act 1998 provides auditors with the power to report where they have specific cocers arisig from their audits: Sectio 8 requires auditors to cosider whether i the public iterest they should report o ay matter comig to their otice; ad Sectio 19 requires the auditor to refer matters to the Secretary of State if he or she has reaso to believe that a orgaisatio has made a decisio that ivolves, or may ivolve, ulawful expediture. 4.9 Sice the joit Natioal Audit Office ad Audit Commissio report Fiacial Maagemet i the NHS , 33 issued i Jue 2005, 29 Public Iterest Reports have bee issued by appoited auditors. The total umber of reports issued i was 25. This compares to four such reports i , ad oe i All the Public Iterest Reports issued have raised auditors cocers about fiacial stadig ad are listed i Figure The circumstaces leadig to the auditor issuig a Public Iterest Report are complex, ad vary from orgaisatio to orgaisatio. There are, however, a umber of commo fiacial maagemet themes, icludig: Iadequate fiacial ad strategic plaig, icludig failure to agree a balaced budget at the start of the fiacial year; Iadequate moitorig of the fiacial positio, both at budget-holder ad Board level; 23 Primary Care Trust ad Strategic Health Authority regularity qualificatios Cause of qualificatio umber of Primary Care Trust Number of Strategic regularity qualificatios Health Authority regularity qualificatios Reveue resource limit breach Capital resource limit breach 1 1 Reveue resource limit ad capital resource limit breach 2 0 Reveue resource limit breach ad irregular expediture 5 2 Other irregular expediture 1 11 Total Source: Aalysis of audit opiios o Primary Care Trust ad Strategic Health Authority accouts 33 Fiacial Maagemet i the NHS NHS (Eglad) Summarised Accouts , HC 60-I, 24 Jue Fiacial Maagemet i the NHS

53 part four Urealistic savigs ad efficiecy programmes that have ot delivered what was required; Failure to agree ad implemet a robust fiacial recovery pla; Weak goverace arragemets, icludig iadequate challege at Board level o the fiacial iformatio preseted; ad Failure by the Board to recogise the seriousess of the positio i timely fashio, ad hece lack of prompt recovery actio There are a umber of lessos that NHS bodies ca lear from these fiacial failures. Fiacial failure does ot just happe out of the blue. Before it occurs, there will be idicators of fiacial problems that are ot ackowledged or addressed. To help with this, chages have bee made to the local audit regime to esure that auditors views ad judgmets are commuicated more starkly, ad that NHS Boards receive the right messages from auditors o a clear ad timely basis (see Auditors Local Evaluatio, Part 5). But NHS bodies must also take actio, ad to assist with this the Audit Commissio is curretly udertakig research to lear the lessos from fiacial failure. The report will be issued i Summer 2006, ad will draw out the factors cotributig to the failures, highlight the steps that could have bee take to prevet them ad make recommedatios to help prevet similar failures i other NHS bodies For NHS Foudatio Trusts, Moitor s compliace regime attributes a risk ratig to fiacial performace o a quarterly basis. The lowest fiacial risk ratig is five ad the highest is oe. NHS Foudatio Trusts with a fiacial risk ratig of less tha 3 move to a more itese mothly moitorig regime. The fiacial risk ratigs aim to provide a early warig system for NHS Foudatio Trusts, as i the case of Royal Devo ad Exeter, Peterborough ad Stamford Hospitals ad Bradford Teachig Hospitals NHS Foudatio Trust (Case Study 4) I , auditors issued 101 referrals to the Secretary of State for Health, uder Sectio 19 of the Audit Commissio Act These reports are set out i Figure 25 overleaf. 24 Public Iterest Reports Royal West Sussex NHS Trust (Jue 2005) South Tees Hospitals NHS Trust (Jue 2005) North Somerset Primary Care Trust (July 2005) Westo Area Health NHS Trust (July 2005) Keet & North Wiltshire Primary Care Trust (July 2005) Shrewsbury & Telford Hospitals NHS Trust (July 2005) Southampto Uiversity Hospitals NHS Trust (July 2005) New Forest Primary Care Trust (July 2005) Hampshire & Isle of Wight Strategic Health Authority (July 2005) Thames Valley Strategic Health Authority (July 2005) West Wiltshire Primary Care Trust (August 2005) Houslow Primary Care Trust (August 2005) Selby ad York Primary Care Trust (September 2005) Royal Wolverhampto Hospital NHS Trust (September 2005) Hilligdo Primary Care Trust (November 2005) Scarborough ad North East Yorkshire Healthcare NHS Trust (November 2005) (Case study 6) Trafford Healthcare NHS Trust (November 2005) Quee Elizabeth Hospital NHS Trust (December 2005) (Case Study 1) Cambridge City ad South Cambridgeshire Primary Care Trusts (December 2005) Surrey ad Sussex Strategic Health Authority (December 2005) Maidstoe ad Tubridge Wells NHS Trust (Jauary 2006) Cheshire West Primary Care Trust (Jauary 2006) North Tees ad Hartlepool NHS Trust (Jauary 2006) East Suffolk Primary Care Trusts (covers Cetral Suffolk PCT, Ipswich PCT ad Suffolk Coastal PCT) (February 2006) Suffolk West Primary Care Trust (February 2006) George Eliot Hospital NHS Trust (April 2006) Kesigto ad Chelsea Primary Care Trust (April 2006) Uiversity Hospital of North Staffordshire NHS Trust (April 2006) West Hertfordshire Quadrat (covers West Hertfordshire Hospitals NHS Trust, St Albas ad Harpede Primary Care Trust, Hertsmere Primary Care Trust, Watford ad Three Rivers Primary Care Trust ad Dacorum Primary Care Trust) (April 2006) Source: Audit Commissio appoited auditors Public Iterest Reports ( Fiacial Maagemet i the NHS 47

54 part four 25 Referrals to the Secretary of State for Health Qualificatios of the regularity opiio (as cosidered above) o the basis of resource limit breaches costitute Sectio 19 referrals to the Secretary of State. There were 92 referrals correspodig to the qualified regularity opiios i respect of 92 reveue ad capital resource limit breaches i I : Four referrals have bee made i respect of likely resource limit breaches by Primary Care Trusts (two of the referrals cover more tha oe Primary Care Trust). These Primary Care Trusts have also bee issued with Public Iterest Reports. Four referrals were issued i respect of actual or likely future breaches of the statutory duty to break eve at NHS Trusts. Two of these Trusts were also issued with Public Iterest Reports. Oe referral was issued i respect of potetially ulawful expediture at a Strategic Health Authority. Source: Audit Commissio Timeliess ad quality of the accouts 4.14 There was o chage to the fial accouts timetable for Strategic Health Authorities, Primary Care Trusts ad NHS Trusts i , with the objective of further improvig the quality of accouts submitted for audit. For the first time, the Departmet required these bodies to submit their uaudited accouts to them i full ad, as Figure 26 shows, the majority of accouts were received o time by auditors ad the Departmet. I auditors opiio, 87 per cet of NHS bodies (excludig Foudatio Trusts) submitted accouts by the agreed deadlie (86 per cet i ). Strategic Health Authorities made sigificat progress i , with oly oe failig to submit accouts o time, compared to six i All NHS Foudatio Trusts submitted accouts o time However, despite the fial accouts timetable beig uchaged, auditors reported a overall declie i the quality of accouts preseted for audit by both Primary Care Trusts ad NHS Trusts. I the auditors opiio, a total of 75 per cet of bodies produced accouts of sufficiet quality compared to 87 per cet i (Figure 26) Regardig the quality ad timeliess of workig papers supportig the figures i the accouts, auditors reported o sigificat chage except a improvemet i timeliess by Strategic Health Authorities (Figure 27). I light of HM Treasury s faster closure iitiative (Part 5), we are cocered that there has bee o improvemet i the quality of workig papers, ad that the quality of the accouts preseted for audit has actually worseed. As this ca have a sigificat impact o the time take to complete the audit, improvemets are eeded i order for earlier deadlies to be achieved. Corporate Goverace Progress has bee made by NHS bodies i the idetificatio ad maagemet of risk, but further improvemet to goverace arragemets i parterships cotiues to be ecessary if they are to deliver the beefits of joied-up service delivery. Statemets o Iteral Cotrol 4.17 Sice every NHS body has bee required to prepare a Statemet o Iteral Cotrol (Statemet) as part of the aual accouts. This describes the body s capacity to hadle risk, ad the risk ad cotrol framework i place. It also cofirms that the body has udertake a review of the effectiveess of the system of iteral cotrol, ad discloses ay sigificat iteral cotrol issues As i , all NHS bodies prepared a Statemet i accordace with guidace issued by the Departmet (or by Moitor for NHS Foudatio Trusts). 93 per cet of bodies (excludig NHS Foudatio Trusts) complied with the requiremet to have the ecessary risk maagemet ad review processes, icludig assurace frameworks, i place throughout the etire fiacial year. All successful applicats for NHS Foudatio Trust status are required to have effective risk maagemet ad review processes i place, icludig cotrols to address pricipal risks NHS bodies are required to disclose i the Statemet ay sigificat iteral cotrol issues idetified durig the year. 26 per cet of bodies (excludig NHS Foudatio Trusts) idetified sigificat iteral cotrol issues, which icluded: the iability to achieve fiacial balace i-year ad o a recurrig basis; ad the eed to further develop assurace frameworks Two NHS Foudatio Trusts (eight per cet) idetified sigificat iteral cotrols issues which icluded: cocers over fiacial balace (Bradford Teachig Hospitals, see Case Study 4); ad delays to the implemetatio of a electroic patiet records system (Homerto Uiversity Hospital). 48 Fiacial Maagemet i the NHS

55 part four 26 Timeliess ad quality of accouts Percetage Trusts PCTs SHAs Accouts were provided o time Accouts were of sufficiet quality Source: Audit Commissio aalysis of appoited auditors fidigs 27 Timeliess ad quality of workig papers Percetage 100 SHAs Trusts PCTs Workig papers were provided o time Workig papers were of sufficiet quality Source: Audit Commissio aalysis of appoited auditors fidigs Fiacial Maagemet i the NHS 49

56 part four Risk maagemet 4.21 NHS bodies cotiue to face a wide rage of risks to the delivery of their objectives, icludig their ability to deliver high-quality care to patiets. Auditors reported that i their opiio 98 per cet of bodies (excludig NHS Foudatio Trusts) had procedures i place by the year-ed to idetify ad documet the pricipal risks threateig the achievemet of their key objectives (Figure 28), compared with 93 per cet i Auditors also reported that i their opiio 94 per cet of bodies had established arragemets which would eable them to address their major risks Moitor state that, as the assessmet ad authorisatio process for NHS Foudatio Trusts focuses o risk maagemet, ad all Foudatio Trusts were awarded at least level oe i the Risk-Poolig Scheme for Trusts 34 i , they believe that all NHS Foudatio Trusts had idetified ad documeted all their pricipal risks, ad had arragemets i place to address them. Parterships 4.23 To deliver moder, itegrated healthcare services, NHS bodies are icreasigly usig partership arragemets, for example with local authorities ad other public, volutary ad private-sector orgaisatios. Comprehesive partership agreemets form the basis for better goverace ad maagemet of risks i parterships. Auditors reported that 26 per cet of Primary Care Trusts ivolved i partership arragemets did ot have a comprehesive siged partership agreemet i place throughout the fiacial year. Auditors also reported problems with the goverace arragemets of parterships at 55 per cet of Primary Care Trusts ivolved i partership workig, which icluded: deficiecies i budgetary cotrol resultig i overspeds; iadequate performace moitorig arragemets; ad lack of fiacial moitorig ad reportig by host orgaisatios (ofte local authorities) The Audit Commissio published a atioal report i November which addresses goverace of parterships i the NHS ad elsewhere, ad cosiders how this ca be improved. Fiacial maagemet issues arisig durig There were a umber of sigificat fiacial maagemet issues facig NHS bodies i Large adjustmets were required to some bodies draft accouts based o errors idetified by appoited auditors. Curret ad forthcomig developmets i the NHS will require icreasigly high-quality fiacial maagemet, goverace ad reportig arragemets. These arragemets form part of the assessmet criteria for NHS Foudatio Trusts, ad have bee critical success factors i their first year of operatio. Differeces betwee the uaudited ad audited accouts 4.25 It is usual for amedmets to be made to a body s draft accouts as a result of the exteral audit. This ca be to rectify mistakes or make adjustmets to iclude additioal, more up-to-date iformatio which materially chages the fiacial positio of the body. These adjustmets ted to lead to icreases ad decreases i both icome ad expediture, ad therefore do ot geerally result i sigificat chages to the atioal positio. However, this was ot the case i The uaudited accouts (icludig Foudatio Trusts) showed a overall deficit across the NHS of millio, which icreased i the audited accouts to millio 36 (Figure 29). 34 See below, Aex Audit Commissio, Goverig Parterships: Bridgig the Accoutability Gap, November A prior-year adjustmet was made to the out-tur of Kesigto ad Chelsea Primary Care Trust i , the effect of which was to icrease the overall oversped for Primary Care Trusts by 7.1 millio i The Departmet was ot required to adjust for this i the NHS summarised accouts sice the sum is ot material by value i the cotext of those accouts. They therefore recogised all the 7.1 millio of expediture i rather tha adjustig the figure for Thus the overall NHS deficit reported i the summarised accouts ad cosolidated accouts of NHS Foudatio Trusts is millio ( millio for the summarised accouts ad 36.9 millio for Foudatio Trusts). However, for the purposes of this report we have adjusted the figures to esure that the actual local positio is accurately reflected i the detailed aalysis. 50 Fiacial Maagemet i the NHS

57 part four 28 The majority of Strategic Health Authorities, Primary Care Trusts ad NHS Trusts had procedures i place durig to documet ad address pricipal risks NHS body Pricipal risks idetified ad documeted Arragemets i place to address risks idetified Number % Number % NHS Trusts Primary Care Trusts Strategic Health Authorities Total Source: Audit Commissio aalysis of appoited auditors fidigs 29 Compariso of NHS bodies uaudited ad audited out-tur for Aggregate uaudited outtur Aggregate audited outtur Adjustmet millio millio millio Strategic Health Authorities (8.8) Primary Care Trusts (202.7) (265.3) (62.6) NHS Trusts (282.9) (321.7) (38.8) NHS Foudatio Trusts (29.8) (36.9) (7.1) 1 Total (133.9) (251.2) (117.3) Source: Departmet of Health, NHS Foudatio Trust cosolidatio returs ad audited accouts of NHS bodies NOTE 1 Of the 7.1 millio overall adjustmet for NHS Foudatio Trusts, 5.9 millio is attributable to audit adjustmets arisig at Uiversity College Lodo Hospitals NHS Foudatio Trust. No other NHS Foudatio Trust required adjustmets of over 0.7 millio The Natioal Audit Office ad the Audit Commissio are cocered about the level of audit adjustmets required durig the audit. The three most sigificat causes for movemets betwee the two set of accouts were prescribig expediture, Ageda for Chage ad adjustmets to service level agreemets. Appoited auditors reported that there was evidece of iappropriate adjustmets ad/or omissios i 125 NHS bodies accouts (21 per cet) i Case Study 6 overleaf outlies the circumstaces at oe such body At a idividual NHS body level, ot recogisig the true fiacial positio may mea bodies fail to take the ecessary corrective actio, or make decisios based o icorrect fiacial iformatio. At Strategic Health Authority ad atioal level it makes it more difficult to assess the fiacial situatio ad respod to it i timely fashio There is also a perverse icetive for NHS bodies (other tha NHS Foudatio Trusts) to uderestimate the size of the deficit i their uaudited accouts. Whe a NHS body (other tha a NHS Foudatio Trust) overspeds, the resources available to it are reduced the followig year (Part 3). This deductio is based o the uaudited deficit with ay sigificat differece i the audited positio beig adjusted the year after. Util , there was a further icetive for bodies to uderestimate deficits i their uaudited accouts, sice the Healthcare Commissio s star ratig assessmet for fiacial balace was based o uaudited figures. However, the Healthcare Commissio s aual health check will replace the star ratig system from ad will iclude the Auditors Local Evaluatio score (see Part 5). Fiacial Maagemet i the NHS 51

58 part four Case study 6 Scarborough ad North East Yorkshire NHS Trust Scarborough ad North East Yorkshire Healthcare NHS Trust has had fiacial difficulties for a umber of years. I , the Trust was i year three of a fiacial recovery pla agreed with its mai commissioer ad the local Strategic Health Authority. Over the last four years the Trust had received fiacial support totallig 10 millio from the Strategic Health Authority; i each case, the Trust had repaid this support i the year followig its receipt. With this support, the Trust met its key NHS Pla waitig time targets for each year ad its fiacial break-eve target util I , it was recogised early i the year that there would be difficulties i achievig fiacial balace, followig difficult egotiatios with the Trust s mai commissioer. The costs of atioal iitiatives such as the cosultat cotract ad reducig waitig time targets also created sigificat fiacial pressures, which became more apparet as the year progressed. I November 2004, the Director of Fiace reported to the Board that whilst the forecast year-ed positio was break-eve, divisioal overspeds were expected to total 6.8 millio by the ed of the year. These overspeds were expected to be partly offset by additioal icome, but durig the Trust also cosidered a umber of further measures to break eve. These icluded a umber of accoutig adjustmets. Before the accouts were prepared, the appoited auditor provided guidace that the proposed adjustmets would ot comply with accoutig stadards as set out i the NHS Trust Maual for Accouts. The Director of Fiace chose to disregard the auditor s view ad prepared a balaced set of accouts. The draft accouts submitted for audit i May 2005 reported a year-ed surplus of 20,000 ad cotaied a umber of iappropriate accoutig adjustmets ad errors. Despite the existece of clear rules o large adjustmets related to purchases made i previous years, the Trust hoped it could reduce i-year spedig by reclassifyig previously purchased medical istrumets as stock ad fixed assets. The accouts also cotaied examples of icorrect accoutig treatmet ad iadequate checkig procedures leadig to sigificat errors. I the Public Iterest Report, the auditor reported that a umber of adjustmets employed by the Trust were a device to achieve fiacial balace, rather tha improve the accuracy of the accouts, ad did ot comply with accoutig stadards. The correctios required to deal with the misstatemets i the origial accouts are set out below: 000 Surplus as reported i draft accouts 20 Previously purchased medical equipmet icorrectly (1,190) reclassified as fixed assets Previously purchased medical equipmet icorrectly (1,616) reclassified as stock Icorrect capitalisatio of salaries (286) Overstatemet of profit arisig from asset sales (266) Reveue costs iappropriately classified as prepaymets (379) Miscellaeous errors arisig from iadequate (789) checkig procedures Audited out-tur positio (4,506) Followig the completio of the audit, the accouts were corrected to show a deficit of 4.5 millio o the icome ad expediture accout. I the auditor s opiio the desire to preset a small surplus at the year ed compromised the productio of true ad fair aual accouts. Sice the Public Iterest Report was issued, the Trust has produced a actio pla to implemet the recommedatios suggested by the appoited auditor. The pla has bee approved by the Board ad is curretly beig implemeted. Source: Appoited Auditor s Public Iterest Report (November 2005) 4.29 The Natioal Audit Office ad the Audit Commissio are workig with the Departmet to esure that large discrepacies betwee audited ad uaudited accouts do ot occur i We recommed that the Departmet takes further steps to support fiace staff throughout the NHS i complyig with techical ad professioal accoutig stadards. As pressure icreases to achieve ad maitai fiacial balace, fiace staff should feel secure ad empowered to raise issues opely as they arise. Prescribig expediture 4.30 Adjustmets to prescribig expediture cotributed sigificatly to the overall shift of millio betwee the uaudited ad audited NHS accouts Pharmacists are reimbursed for the drugs they dispese by the Prescriptio Pricig Authority o behalf of Primary Care Trusts, who are the recharged for the paymets made. The timetable for processig prescriptios meas that Primary Care Trusts are recharged the cost of 52 Fiacial Maagemet i the NHS

59 part four the prescriptios o average two to three moths after they are dispesed. As a result, all the expediture o prescriptios dispesed i February ad March, ad some of those dispesed i Jauary are ot paid for util the followig fiacial year. Primary Care Trusts therefore have to accrue for this expediture i their accouts. As iformatio o the actual expediture icurred i the year is ot received from the Prescriptio Pricig Authority util after draft accouts have bee submitted, Primary Care Trusts estimate their costs for the fial two to three moths of the year. As the actual costs are kow before the completio of the audit, we would expect Primary Care Trusts to make chages to these estimates, where there are material differeces Auditors reported cocers that, i their opiio, 15 per cet of Primary Care Trusts had attempted to reduce prescriptios expediture i the draft accouts i order to reduce oversped agaist reveue resource limits. It was reported that some NHS bodies had bee advised by their Strategic Health Authorities to make adjustmets to the year-ed accrual, ad i some cases these adjustmets did ot appear to be supported by the available iformatio. These usupported adjustmets led to icosistecies betwee opeig ad closig creditors ad material misstatemets i the accouts There were a large umber of adjustmets made to idividual bodies draft accouts as a result of material errors idetified by auditors. May of these errors came to light whe auditors compared the level of accrued expediture i the draft accouts with the actual amouts otified by the Prescriptio Pricig Authority. Ageda for Chage 4.34 Arragemets for the ew Ageda for Chage pay system were rolled out atioally for staff o atioal cotracts from 1 December 2004, with a backdated implemetatio date of 1 October Durig NHS bodies udertook work to match staff to their ew pay bads ad complete the process of assimilatig staff to the ew system, with a deadlie for all NHS staff to be assimilated by October This was ot fully achieved, although the Departmet reports that 98.7 per cet of NHS staff had bee assimilated by March Fiacial Maagemet i the NHS highlighted that implemetig these sigificat chages to the pay arragemets of NHS staff was likely to create cost pressures for most NHS bodies i NHS bodies were required to reflect i the accouts their liabilities for pay backdated to 1 October 2004, ad the Departmet issued guidace to NHS bodies that liabilities should be calculated ad recorded i accordace with Fiacial Reportig Stadard 12. However, auditors reported cocers that ie per cet of NHS Trusts ad Primary Care Trusts did ot follow the Departmet s guidace ad accouted iappropriately for Ageda for Chage liabilities. I may cases NHS bodies had disclosed a cotiget liability i their draft accouts whe a provisio should have bee recorded. There had also bee uder reportig of provisios, where the provisio had bee based o the fudig available istead of the actual liability. Itra-NHS balace agreemets 4.37 For , the agreemet of balaces at the ed of moth ie of the fiacial year was exteded to iclude all NHS bodies, ot just those withi the same Strategic Health Authority area. NHS Trusts were also required for the first time to agree icome ad expediture balaces as well as debtors ad creditors, both at moth ie ad at the year ed Auditors reported that oe of the reasos for cosiderig some NHS bodies accouts to be of isufficiet quality i was that sigificat discrepacies i itra-nhs balaces had ot bee resolved. This resulted i late adjustmets to service level agreemets which delayed the completio of the audit ad i additio to the factors cosidered above cotributed to the overall shift betwee the uaudited ad audited NHS accouts. Auditors had cocers over the process of fialisig service level agreemets i , reportig that 79 per cet of NHS Trusts ad 83 per cet of Primary Care Trusts did ot have siged service level agreemets i place with their mai commissioig or provider bodies at the start of the fiacial year. Some of these agreemets were ot siged util the ed of the year, ad some were ot siged at all. 37 This figure excludes NHS Foudatio Trusts. 38 Natioal Audit Office/Audit Commissio, Fiacial Maagemet i the NHS: NHS (Eglad) Summarised Accouts , Jue 2005, p. 46. Fiacial Maagemet i the NHS 53

60 part four 4.39 Disputes ad icosistecies over idividual bodies itra-nhs balaces also have a sigificat impact at a atioal level o the summarised accouts. If NHS bodies do ot treat such balaces appropriately ad cosistetly at local level, there is a risk that key figures i the summarised accouts caot be effectively verified. I , cosiderable additioal work had to be udertake by the Natioal Audit Office to gai sufficiet assurace over itra-nhs balaces reported i the summarised accouts It is importat that local bodies improve their processes ad work with auditors to resolve these issues more quickly i future. Orgaisatios which fail to do so will ot oly hamper progress towards faster closure (Part 5), but also expose themselves to greater operatig risk by relyig o iaccurate or out-of-date iformatio for decisio-makig. 39 Revaluatio of the NHS Estate 4.41 The NHS Estate is subject to revaluatio every five years ad the valuatio is udertake by the District Valuer. The last revaluatio took place o 1st April 2005 but, i order to esure that NHS bodies had up-to-date iformatio for the preparatio of the capital charge estimates, the valuatio was udertake durig the early part of All NHS bodies received draft valuatios by July Where material impairmets (dowward revaluatios) were idetified i the draft valuatios, bodies were required to reflect these i their accouts. All other valuatio adjustmets were required to be accouted for as at 31 March Although NHS bodies received the results of the 2005 revaluatio exercise i July 2004, appoited auditors foud that there were a umber of uresolved differeces betwee the valuatios i some bodies draft accouts ad iformatio received from the District Valuer. This caused delays i the completio of the audit, as i some istaces the District Valuer was required to provide revised valuatios at a late stage. NHS bodies eed to accout for chages i asset valuatios as soo as they are kow, so that differeces ca be idetified ad resolved durig the year rather tha at the year ed. The preparatio of mothly maagemet accouts, icludig balace sheet iformatio, would assist i this process. Geeral Medical Service cotracts 4.43 Uder the ew Geeral Medical Services (GMS) cotract, itroduced o 1 April 2004, a ew way of allocatig fuds to GPs ad other primary care professioals was itroduced. The ew GMS is a idividual cotract betwee a practice ad the primary care orgaisatio (ormally a Primary Care Trust). The cotract rewards GPs for quality of care, ad icetives are provided to treat patiets at the surgery rather tha at the hospital Appoited auditors cosidered the fiacial maagemet arragemets relatig to the implemetatio of ew workforce cotracts i selected Primary Care Trusts 40 where the implemetatio of the GMS cotract was cosidered to be a high audit risk. I 70 per cet of these bodies, auditors foud arragemets specifically i relatio to the ew GMS to be fairly robust, but 67 per cet of the Primary Care Trusts audited had ot estimated the fiacial impact of the ew cotract i the medium term. However, it should be oted that Primary Care Trusts based their forecast of GMS costs o figures provided by the Departmet. The actual cost to the NHS of implemetig the ew GMS cotract was approximately 300 millio higher tha the Departmet s forecast. 41 This was maily due to practices exceedig the aticipated performace o the Quality ad Outcomes Framework ad Out of Hours. 42 Whilst this is a positive outcome from a patiet care perspective, it has caused fiacial pressures i some orgaisatios It is crucial that the Departmet works with Primary Care Trusts to idetify accurately the fiacial impact of the ew cotract, both for curret ad future years, as resource allocatio decisios will be made o the basis of these calculatios. Primary Care Trusts should esure that they have the required data, have udertake medium term spedig forecasts ad have assessed the impact o other budgets. 39 Our previous report examies i more detail the risks to bodies of usig iaccurate iformatio for maagemet reportig ad forecastig. See Fiacial Maagemet i the NHS NHS (Eglad) Summarised Accouts , pp Workforce cotracts audits were oly udertake at bodies that were cosidered to be at greater risk. Therefore the fidigs cited here are based o a skewed sample set ad do ot ecessarily represet the atioal picture. 41 Source: Ucorrected trascript of oral evidece (HC 736-I) Public Expediture o Health ad Persoal Social Services 2005, Health Select Committee, 1 December Subsequet aalysis by the Departmet suggests a slightly smaller shortfall of 284 millio. 42 Out of Hours services are covered i detail i the Natioal Audit Office report The Provisio of Out-of-Hours Care i Eglad, HC 1041, 5 May Fiacial Maagemet i the NHS

61 part four Paymet by Results 4.46 As idetified i our last report, the itroductio of Paymet by Results brigs sigificat chage to the NHS fiacial regime. By itroducig a sigle rules-based system across the NHS, which pays hospitals for the work they do, the ew paymet system is iteded to icrease the fairess ad trasparecy of paymets to NHS Trusts ad other providers, to reward efficiecy ad to facilitate patiet choice. It also brigs a uprecedeted level of risk for both commissioers ad providers, ad greater potetial for fiacial istability. It requires better data ad stroger fiacial maagemet withi NHS bodies, i particular robust medium-term plaig ad budgetig I , there were a umber of early implemeters of Paymet by Results, primarily NHS Foudatio Trusts ad the Primary Care Trusts which commissio from them. The Audit Commissio report Early Lessos from Paymet by Results, 43 published i October 2005, set out the experieces of early implemeters, ad idetified importat factors behid operatig successfully i the ew eviromet The early implemeters have welcomed the better basis for plaig ad maagig their busiess which Paymet by Results provides, ad are mostly positive about the chage. However, it is clear that the early implemeters have bee challeged by the ew system ad the potetial for Paymet by Results to destabilise local health ecoomies has certaily bee felt. I some cases, it has exposed uderlyig fiacial difficulties ad raised further cocers about the adequacy of fiacial maagemet arragemets i the NHS. The ease with which bodies have adapted has depeded upo their uderlyig fiacial stability. Health ecoomies with a uderlyig historic deficit have foud that Paymet by Results has teded to icrease fiacial pressure ad polarise orgaisatioal iterests, leadig to disputes. I-year chages i the desig ad implemetatio of the system have exacerbated the challeges, icreasig ucertaity ad impactig o fiacial ad operatioal plas To reduce the risk of fiacial istability, a umber of local variatios o Paymet by Results were applied i some local health ecoomies, icludig the use of caps ad floors o activity levels. NHS bodies had valid cocers that the level of risk iheret i the policy desig is too great, particularly i the case of o-elective activity where it is more difficult to ifluece volumes ad cotrol paymets May of the difficulties with Paymet by Results i stemmed from poor plaig ad icosistet assumptios about activity levels betwee parties. Fiacial plaig must be uderpied by a commo set of expectatios ad joit plaig assumptios. Strategic Health Authorities should be facilitatig this process, as well as thoroughly reviewig the fiacial impact of Paymet by Results o idividual orgaisatios ad the health ecoomy. I additio, improvemet i medium term plaig ad forecastig is still a priority. At acute Trusts, costig systems eed to be stregtheed, with orgaisatios ivestig time i uderstadig how costs chage, ad i particular the trigger poits for sigificat additioal costs. At Primary Care Trusts, the presece of robust systems to maage demad ad moitor paymets has prove crucial to maagig the fiacial positio Experiece i also highlighted the ogoig eed for improvemets i data quality. For example, icomplete codig of diagoses or procedures ca result i a loss of icome for NHS Trusts ad NHS Foudatio Trusts. Work is uder way to develop a atioal assurace framework to help reduce the risk of icorrect paymets due to iaccurate data Fially, the more successful early implemeters have recogised that Paymet by Results requires a chage i culture across the orgaisatio, ot just i fiace. The implicatios eed to be well uderstood outside the fiace departmet, particularly by cliicias, so that the risks ca be better maaged ad the beefits realised. We cosider the eed for NHS bodies to expad awareess of fiacial matters throughout the orgaisatio i Part 3. Cliical Negligece 4.53 Cliical egligece is the term give to a breach of a duty of care by healthcare practitioers i the performace of their duties, ad cofirmed as such by the employig NHS body or through legal process. The NHS Litigatio Authority 44 ( the Authority ) is resposible for maagig cliical egligece claims withi the NHS o behalf of Primary Care Trusts, NHS Trusts ad NHS Foudatio Trusts. It accouts for the costs ad liabilities associated with these claims, collectig aual cotributios from each NHS body to cover the aticipated paymets for the fiacial year. However, idividual NHS bodies retai their duty of care ad the legal liability for cases arisig. 43 Audit Commissio, Early Lessos from Paymet by Results, October The NHS Litigatio Authority is a Special Health Authority, set up uder the NHS Act 1977 to admiister NHS cliical egligece liabilities ad promote risk maagemet. Its remit has sice bee expaded to iclude schemes ad risk maagemet for o-cliical liabilities ad the provisio of iformatio o huma rights case law. Fiacial Maagemet i the NHS 55

62 part four 4.54 I , the Authority paid out 503 millio for all cliical egligece schemes ( : 422 millio). However, there was a drop i the actual umber of claims made, from 6,251 i to 5, i The NHS expects to make future paymets totallig 6.9 billio (at today s prices) i respect of kow or expected claims ( : 6.3 billio). 2.8 billio of this is expected to be paid withi the ext five years. These sums are show as provisios i the Authority s accouts. 46 A additioal 3.1 billio of claims are possible, but ulikely, ad these are show as cotiget liabilities i the Authority s accouts. The provisios represet the value of claims received, at today s prices, calculated to reflect the probability of each claim beig settled wheever that might occur. This icludes a estimate made by actuaries of liabilities icurred but ot yet reported to the Authority. Whilst provisios have bee icreasig steadily over recet years, amouts actually paid out to settle claims have fluctuated, showig a five per cet decrease from 2003 to 2004 ad a 19 per cet icrease betwee 2004 ad The Authority s Framework Documet 47 requires it to provide icetives for NHS bodies to improve cost effective cliical ad o-cliical risk maagemet. I deliverig this objective, the Authority requires NHS bodies to participate i its risk maagemet programme. This icludes assessmet by idepedet assessors agaist a umber of risk maagemet stadards addressig cliical, o-cliical ad orgaisatioal risks. Most stadards are awarded from Level Zero (weakest) to Level Three (strogest), ad the higher a Trust s ratig, the lower the cotributios it pays to the Authority uder the relevat scheme More tha 500 assessmets were completed durig ad the overall outcome showed a sigificat improvemet over previous years. Uder the stadard relevat to cliical egligece risk, the proportio of Trusts achievig Level Oe or above rose from 95 per cet i to 100 per cet i The proportio achievig Levels Two or Three also rose, from 21 per cet i to 26 per cet i (Figure 30). 30 NHS Trusts assessmets agaist CNST geeral stadards i 2004 ad 2005 NHS Trusts' assessmets agaist CNST geeral stadards at 31 March 2004 NHS Trusts' ad Foudatio Trusts' assessmets agaist CNST geeral stadards at 31 March 2005 Level 3 Level 0 Level 3 Level 2 Level 2 Level 1 Level 1 Source: NHS Litigatio Authority 45 The figures cited iclude claims made uder the Cliical Negligece Scheme for Trusts (CNST), Existig Liabilities Scheme (ELS) ad Ex-Regioal Health Authority Scheme (Ex-RHAs) scheme. They exclude claims made uder the Property Expeses Scheme (PES) ad Liability to Third Parties Scheme (LTPS) sice these do ot pertai to cliical egligece (see Aex 6). 46 NHS Litigatio Authority Report ad Accouts , HC 149, 21 July The amouts cited iclude the Authority s provisios uder the CNST, ELS ad Ex-RHAS, but exclude PES ad LTPS (see Aex 6). 47 NHS Executive, The Natioal Health Service Litigatio Authority: Framework Documet, figures iclude NHS Foudatio Trusts, but exclude Ambulace Trusts, sice these are ow assessed agaist a separate NHSLA ambulace stadard. 56 Fiacial Maagemet i the NHS

63 part four 4.58 After a fudametal review i 2004 of its approach to stadards ad assessmets, the Authority has decided that the cotet of its stadards should be revised to create a sigle set of stadards for each type of NHS trust icorporatig orgaisatioal, cliical ad o-cliical health ad safety risks. These ew stadards are iteded to be fully operatioal from April Followig the Chief Medical Officer s cosultatio o reformig compesatio arragemets i the NHS, 49 the NHS Redress Bill was published i October Its aim is to establish a NHS Redress Scheme ad place a duty o providers ad commissioers of hospital services to esure patiets receive a cosistet, speedy ad appropriate respose to cliical egligece. The scheme will cover lower-value claims ( 20,000 or less), ad will aim to offer patiets a rapid ad cost-effective alterative to litigatio. NHS Foudatio Trusts 4.60 NHS Foudatio Trusts are free-stadig, ot-forprofit orgaisatios with a duty to provide NHS services to NHS patiets accordig to NHS stadards ad priciples. They are authorised ad regulated by Moitor (whose statutory ame is the Idepedet Regulator of NHS Foudatio Trusts), ad ca borrow commercially, retai surpluses ad ivest to improve services for patiets NHS Foudatio Trusts were i operatio durig : 10 for the etire year, a further 10 from 1 July 2004 ad five more from Jauary A further seve were established i , ad eight more to date i : three from 1 May 2006 ad five more from 1 Jue Figure 31 overleaf shows the 40 NHS Foudatio Trusts i existece as at 1 Jue NHS Foudatio Trusts operate uder a differet fiacial ad accoutig regime from NHS Trusts. This is chiefly because Moitor aims to brig NHS Foudatio Trusts i lie with UK Geerally Accepted Accoutig Practice (UK GAAP), thus providig greater trasparecy ad comparability with the commercial sector i the UK. The key differeces are that NHS Foudatio Trusts do ot have access to brokerage or fiacial support, ad that they must accout for impairmets (dowward revaluatio of assets) i accordace with Fiacial Reportig Stadard 11. This latter differece meas that impairmets are charged directly to the icome ad expediture accout rather tha beig offset to the revaluatio reserve or covered by offset fudig from the Departmet, as is the case with NHS Trusts. The full adoptio of Fiacial Reportig Stadard 11 caused 7.9 millio of impairmets to be charged to the icome ad expediture accouts of NHS Foudatio Trusts i These impairmets reduced the bottom-lie performace of NHS Foudatio Trusts i a way which they would ot for NHS Trusts. A further caveat o comparability is that NHS Foudatio Trusts were operatig uder Paymet by Results (paragraphs ) i , which meat that their icome icreased or decreased based o actual activity rather tha beig fixed uder block cotracts. These fluctuatios i icome uder Paymet by Results would ot have applied to NHS Trusts. Care should therefore be take i comparig the performace of the two types of body. The fiacial performace of both NHS Trusts ad NHS Foudatio Trusts is outlied i more detail i Part As part of Moitor s statutory reportig duty uder the Health ad Social Care (Commuity Health ad Stadards) Act 2003, it produced a operatig review of NHS Foudatio Trusts to accompay the first cosolidated accout of these bodies i The key fidigs regardig fiacial maagemet ad goverace were: NHS Foudatio Trusts faced a challegig year with the adjustmet to a ew regulatory regime ad the implemetatio of ew iitiatives such as Paymet by Results ad Ageda for Chage. The disciplies of NHS Foudatio Trust status are pushig orgaisatios towards higher stadards of fiacial maagemet. NHS Foudatio Trusts uderstad the importace of strog corporate goverace, with Boards respodig effectively to their ew resposibilities. The role of o-executive directors is crucial; they must possess a rage of experiece ad expertise, particularly of a fiacial ature. 49 Sir Liam Doaldso, Makig Ameds: A cosultatio paper settig out proposals for reformig the approach to cliical egligece i the NHS, Jue Review ad Cosolidated Accouts of NHS Foudatio Trusts , HC 622, 22 November Fiacial Maagemet i the NHS 57

64 part four 31 NHS Foudatio Trusts as at 1 Jue 2006 Authorised o 1 April Basildo ad Thurrock Uiversity Hospitals 2 Bradford Teachig Hospitals 3 Coutess of Chester Hospital 4 Docaster ad Bassetlaw Hospitals 5 Homerto Uiversity Hospital 6 Moorfields Eye Hospital 7 Peterborough ad Stamford Hospitals 8 Stockport 9 Royal Devo ad Exeter 10 The Royal Marsde Authorised o 1 July Cambridge Uiversity Hospitals 12 City Hospitals Suderlad 13 Derby Hospitals 14 Gloucestershire Hospitals 15 Guy s ad St. Thomas 16 Papworth Hospital 17 Quee Victoria Hospital 18 Sheffield Teachig Hospitals 19 Uiversity College Lodo 20 Uiversity Hospital Birmigham Authorised o 1-5 Jauary Barsley Hospital 22 Chesterfield Royal Hospital 23 Gateshead Health (from 5 Jauary) 24 Harrogate ad District 25 South Tyeside Authorised o 1 April Liverpool Wome s 27 Lacashire Teachig Hospitals 28 Royal Natioal Hospital for Rheumatic Diseases 29 Royal Bouremouth ad Christchurch Hospitals 30 Frimley Park Hospital 31 Heart of Eglad Authorised o 1 Jue Rotherham Authorised o 1 May Oxleas 34 South Essex Partership 35 South Staffordshire Healthcare Authorised o 1 Jue Salisbury 37 Royal Berkshire 38 The Newcastle upo Tye Hospitals 39 Southed Uiversity Hospitals 40 Yeovil District Hospital Source: Natioal Audit Office 58 Fiacial Maagemet i the NHS

65 part four 4.64 It is ot oly NHS Foudatio Trusts which must seek to achieve soud fiacial maagemet ad goverace. All NHS bodies must develop the requisite skills ad structures, ot least because it is expected that every NHS Trust will be i a positio to apply for NHS Foudatio status by By addressig this eed ow through appropriate Board appoitmets, trasparet reportig ad a culture of costructive challege, NHS Trusts ca reap immediate rewards as well as icreasig their future eligibility for Foudatio status. Private Fiace Iitiative Projects 4.65 The Govermet s NHS Pla of July 2000 stated that over the ext te years there would be major ivestmet i ew NHS buildigs, with a exteded role for the Private Fiace Iitiative (PFI). As at November 2005, there were almost 130 actual or plaed PFI schemes across the NHS, with a estimated capital value of 18.3 billio (Figure 32). Of these, 76 projects were either operatioal or the cotract had bee siged. The majority of schemes are i the acute hospital sector, which accouts for over 90 per cet of the estimated capital value of health PFI projects The Departmet ad HM Treasury evisage that PFI will remai the major vehicle for deliverig capital ivestmet i acute services i the NHS. After completio of a reappraisal curretly beig udertake by Strategic Health Authorities, it is expected that the NHS will remai the largest sigle user of PFI i govermet I , 385 millio was paid i aual charges to the cotractors o the 43 cotracts (with a capital value of 1.9 billio) which were operatioal. This icluded 322 millio o 19 of the bigger first-wave hospital PFI cotracts. The ew facilities at those hospitals had bee operatioal for 18 moths or more at 31 March Figure 33 overleaf shows the Departmet s estimated aggregate of future paymets uder the 76 PFI cotracts which are either operatioal or which have bee siged up to November It excludes schemes at preferred bidder stage or at a earlier stage i the procuremet process. If ad whe these schemes are approved, the committed paymets will rise above the levels show. 32 Number ad Capital Value of Actual ad Projected PFI Schemes as at November 2005 Acute Hospital Trusts Other Trusts Total Project Stage No. Capital value No. Capital value No. Capital value ( billio) ( billio) ( billio) Operatioal i Cotract Siged Preferred Bidder Stage Future Schemes Total Source: Departmet of Health NOTE 1 These figures are take from the September 2005 bi-aual budgetary retur to Treasury from the Departmet of Health. All plaed schemes deped upo cotiuig support i the form of Strategic Health Authority ivestmet plas. The exact capital figures for future schemes ad those at preferred bidder stage may therefore be subject to chage. Fiacial Maagemet i the NHS 59

66 part four 4.69 At local level, ay large-scale hospital-buildig project ca create cost pressures ad icrease fiacial risk, sice it commits a orgaisatio to pre-determied levels of capacity ad fixed costs over a umber of years. This may reduce the orgaisatio s ability to respod flexibly to chagig activity treds, or to reduce costs by service recofiguratio ad restructurig. For NHS Trusts, the itroductio of Paymet by Results ad Choice (paragraphs ) rather tha block cotracts brigs icreased ucertaity over both activity levels ad icome. As PFI uitary charges ca represet a sigificat proportio of a Trust s fixed costs (see Case Study 1 o Quee Elizabeth Hospital NHS Trust), bodies with PFI commitmets must have sufficiet flexibility elsewhere i their cost base to accommodate fluctuatios i activity ad icome As Figure 34 shows, the fiacial performace of NHS Trusts i does ot reflect ay immediate correlatio betwee the distributio of surpluses or deficits ad the presece of PFI projects. Of the 259 NHS Trusts (excludig NHS Foudatio Trusts) operatig i , were makig uitary paymets uder PFI schemes. 11 of these (31 per cet) reported a deficit, while 25 (69 per cet) reported break-eve or surplus. This is a slightly higher icidece of deficits tha amogst the 223 NHS Trusts without PFI schemes, where 57 bodies (26 per cet) reported a deficit. However, the relatively small umber of NHS Trusts curretly operatig PFI schemes meas that purely statistical comparisos should be treated with cautio The Natioal Audit Office will be examiig PFI projects ad their fiacial implicatios for the NHS i more detail as part of their work o the NHS accouts. 33 Estimated aggregate paymets uder siged PFI cotracts Year Paymet Year Paymet ( millio) ( millio) , , , , , ,133 Year Paymet Year Paymet ( millio) ( millio) , , , , , , , , , , , , , ,111 Source: Departmet of Health, based o data as at November 2005 NOTE Figures used are i cash (udiscouted) terms. Paymets after are lower because early cotracts will have eded. 51 This figure icludes all NHS Trusts, icludig ambulace trusts ad metal health trusts, ad excludes Primary Care Trusts. It therefore icludes some bodies from the Other Trusts colum i Figure 34, ad hece will ot equal the umber of Acute Hospital Trust schemes cited i the first colum. 60 Fiacial Maagemet i the NHS

67 part four 34 Distributio of PFI projects across NHS Trusts by out-tur surplus/deficit, m (8) NHS Trust with operatioal PFI project i (16) NHS Trust without operatioal PFI project i (24) (32) 259 NHS Trusts operatig for all or part of (36 NHS Trusts had operatioal PFI schemes i , ad 223 did ot) Source: Natioal Audit Office aalysis of Departmet of Health Data Fiacial Maagemet i the NHS 61

68 part five Part FIVE Fiacial issues arisig i ad beyod 62 Fiacial Maagemet i the NHS