NHS: From Boom to Bust

23 July 2008 (Last Updated July 23rd, 2008 18:30)

In 2008 the NHS revealed a surplus of £515m, despite just one year earlier recording a £547m deficit. The revelation caused a stir and the NHS is reportedly on target to achieve another £1.8bn surplus, but how? Frances Penwill-Cook reports.

NHS: From Boom to Bust

Balancing the books at the NHS has wreaked havoc on the service, say some. With a deficit of £547m recorded in the 2006–2007 financial year, a strategy to move the NHS to surplus was implemented by the British Medical Association.

One year later it returned £515m in the black and so far this year it says it is on target for a further £1.8m surplus. Some argue the figure could actually be as great as £3.1bn with trusts, not wanting to lose out, pre-paying suppliers in a bid to hold on to their levels of funding.

"Local poor management, inadequate leadership, loss of control, poor accounting and lack of engagement with clinicians are cited as some of the main problems."

The announcements have caused a stir among some who say the service has gone too far with its cost cutting. Nurses and doctors unions have claimed that patients and employees have been put through the unnecessary pain of jobs and service cuts to meet the aggressive targets.

To understand how the NHS got to where it is requires an understanding of the government-wide system of Resource Accounting and Budgeting (RAB), implemented in 2001. Under the RAB both under and overspending are carried forward to the next year's revenue allocation. In the report, NHS financial performance 2005–06, it was shown the deficit was exaggerated by £117m because deficits were carried forward from the previous year.

While the RAB may have caused exaggerated figures, trusts with historic problems like Queen Elizabeth Hospital in Woolwich, Norfolk & Norwich and Barnet & Chase Farm contributed to the budget overspend. There have also been big increases in staff numbers, particularly among senior management, which has increased 77% since 1997.

Local poor management, inadequate leadership, loss of control, poor accounting and lack of engagement with clinicians are also cited as some of the main problems.

It is confirmed in the Public Expenditure on Health and Personal Social Services 2006 report that pay rises have also made a major contribution to the increase in staffing costs. An additional 56% was spent on staff in 2005 to 2006, of which 47% was due to pay increases.

FROM DEFICIT TO SURPLUS

In order to overcome the deficit a strategy to move to a surplus position was undertaken, but according to a British Medical Association (BMA) spokesperson, "the journey to balance the books wreaked havoc on the NHS".

"The journey to balance the books wreaked havoc on the NHS."

There were reportedly excessive cuts in services and money taken away from important areas such as training, education and research.

"Hospital consultants were blocked from introducing new treatments and services for patients," explains a BMA spokesperson. "Operations were delayed, recruitment was frozen and trained doctors and other healthcare staff struggled to find jobs, while the NHS attempted to get its finances sorted."

CUTS AND CHAOS

Although a period of chaos ensued at the NHS, it did succeed in gradually moving from deficit to surplus. However, as Dr Hamish Meldrum, Chairman of Council at the BMA observes, "you have to look at what trusts have done to get out of the red. At the end of last year we saw services to patients being cut, with operations delayed, outpatient clinics cancelled and referral management schemes."

While the NHS was heavily criticised in the media for making a surplus, it was pointed out by the NHS Confederation that the size of the surplus should be taken into perspective as it is less than half of 1% of the NHS budget.

The Department of Health declared that the surplus indicates stability within the NHS and that it allows further investment in health services for patients: "This healthy surplus is a further indication that the NHS is now on a stable financial footing," says Meldrum. "Thanks to the tremendous efforts of those in the NHS, organisations now have the headroom and confidence to invest in transforming patient services, whilst having the flexibility to respond to fluctuations in demand."

TESTING TARGETS

"At the end of last year we saw services to patients being cut, with operations delayed, outpatient clinics cancelled and referral management schemes."

The NHS is on target for achieving its new surplus of £1.8m, however, there are still issues to be tackled. "There are still hospitals that are threatening to lay off hundreds of staff in order to break even," says Meldrum. "Budgets that used to be set aside for the training of doctors and nurses have been raided, with long-term consequences for the future NHS workforce."

Some NHS and hospital managers believe that the real surplus is more like £3.1m. A flurry of pre-payment to suppliers has been reported in the media, along with the suggestion that the NHS is attempting to suppress the growing surplus figure in line with financial predictions to avoid more media headlines.

SUPPLIER PRE-PAYMENT

In the eyes of the Healthcare Commission, it is acceptable for NHS trusts to pre-pay suppliers where a reduced cost would mean that it is financially beneficial to do so. Doris-Ann Williams, Director General of the British In-Vitro Diagnostics Association (BIVDA), explains that a flurry of pre-payments towards the end of the year is not unusual.

"Hospital labs are funded chiefly by an annual budget from their trust to fund all tests for the year and as a result there is often a small surplus at the end of the financial year, which the labs will use or there is fear that their budgets would be cut for the next year."

"There were more than normal purchases going on for capital equipment of value less than required going to tender by EU law and also for pre-purchasing that could be 'called off' in the next year."

ONE STEP FURTHER

What is hinted at by the observation of more orders than usual being placed that can be "called off" is that this time pre-payment has gone one step further. This year the number of orders placed was confirmed as exceptional, indicating that there is in fact a greater surplus than the predicted £1.8m and that measures were being taken to try and reduce the final figure.

"This year the expenditure was more than usual and one company director was fearful that his international bosses would expect the next quarter's sales to match this unexpected sales volume," explains Williams.

BOOM AND BUST

While NHS organisations are working on their financial stability, what should be done with the surplus, whether it is £1.8bn or the rumoured £3.1bn? Meldrum believes it is vital that "further turmoil of boom and bust" is avoided.

"We would like crucial budgets to be restored and longer-term, cost-effective policies to be adopted…we will expect the government to work with us to ensure that a stable, coherent and sustainable system of NHS financing is put in place for the future," he says.

"Some NHS and hospital managers believe that the real surplus is more like £3.1m."

So what approach should the NHS be taking towards its spending? Victoria Howes, Healthcare Economist at the Healthcare Commission, explains that although the financial performance of the NHS is improving the focus needs to be on the best way to look after its patients within budget.

"Where trusts are making an aggregate surplus they need to ensure they are using the money available to them in a way which will best serve their patients," she says. "All NHS organisations should be working within their budget and their statutory financial duties, and set budgets and plans based on the level of income they receive."

In line with the NHS Deficits report, the BMA believes the key to success is, "working in partnership with clinicians. With this, financial benefit will follow."