15 December 2006
The Department of Health has admitted that the financial regime governing NHS trusts is unsustainable, yet has declined to implement an Audit Commission recommendation to correct it.
Under Resource Accounting and Budgeting rules, any overspend is deducted from a trust's allocation the following year. But because trusts also have to balance their books over a three-year period, overspenders have to live with a reduced allocation and make a surplus equivalent to the previous year's overspend.
In July this year, the Audit Commission found the system had been applied inconsistently, prevented trusts from planning ahead, and had exacerbated NHS deficits.
It recommended that it be abolished by the end of this financial year and that deductions levied against hospital trusts – up to £545m this last year – be returned.
Instead of using Rab deductions to ensure the DoH as a whole kept within its expenditure limits, the Audit Commission recommended that the department establish a 'buffer' of reserve cash.
In the NHS Operating Framework for 2007/08, published on December 11, the DoH said: 'The way in which Resource Accounting and Budgeting is applied to NHS trusts… will become increasingly unsustainable as we move forward with the programme of reform… However, we cannot commit to implementation of this recommendation.'
The DoH explained it could not afford to carry out the Audit Commission's solutions. 'The resource buffer needs to be created from within the resources available to the NHS. As we have made clear in the past, no additional resources will be provided by the government for this purpose,' the framework says.
Instead, the DoH will introduce a 'more formal system' of loans to help trusts cope with their Rab deductions and underlying deficits. That will replace the informal brokerage system that has made deciphering where deficits stem from difficult.
Transfers between trust capital and revenue allocations – used to cover up over £800m in revenue overspends over the past five years – will also be prevented by a new borrowing regime in which investments are financed through loans, similar to the foundation trust regime.
NHS chief executive David Nicholson repeated his pledge of recent months that the system as a whole would break even by the end of the financial year. In 2008/09 he expects it to produce a surplus of £250m.
That balance will in part be produced through the further devolution of central funds to strategic health authorities.
Earlier this year the DoH devolved £5.85bn previously ringfenced for training and public health to SHAs.
That led to accusations that the DoH was sanctioning the 'raiding' of training and public health budgets to cover deficits.
An extra £1bn has now been added to those devolved funds, including a budget covering student bursaries, but the framework emphasised that rules would apply as to how those funds should be spent.
But MPs on the Commons health select committee questioned whether SHAs themselves could be trusted with NHS financial management.
Speaking at the publication of the committee's report into NHS deficits on December 13, Sandra Gidley MP said: 'The long-standing problems should have been picked up much earlier by the auditors and the SHAs. You can apportion blame all over the place but they haven't done the job properly… and they haven't put in plans to address the problem. So we really need to be looking at that senior management and whether they are fit for purpose.'
The committee also recommended that Rab be scrapped.
Asked whether he would now ask the department to withdraw its 2007/08 operating framework, committee chair Kevin Barron told Public Finance: 'The DoH will have respond to this report before the start of the next financial year.
'That's why we made sure it was out now. We'll wait with interest to see what the government says.'
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