The challenges facing local NHS bodies are unprecedented and improved financial management will be essential to meeting them, according to a study by the National Audit Office and the Audit Commission. The report, Financial Management in the NHS, published today, is the first joint study carried out by the NAO and the Commission.Jump to downloads
It shows that in 2003-04 the Department of Health achieved overall financial balance across the 600 local NHS bodies. Moreover, most individual NHS bodies achieved financial balance. However, the number of individual NHS bodies failing to achieve financial balance increased from 12 to 18 per cent, with more incurring significant deficits. The position deteriorated further in 2004-05. Although the Department does not have firm audited figures, it estimates that, in 2004-05, the NHS in aggregate incurred a small deficit. But the number of individual organisations with significant deficits will have further increased. At least 12 Strategic Health Authorities will have ended 2004-05 with a deficit compared with 7 the previous year.
Those NHS bodies with deficits need to take steps not only to achieve current financial balance, but also to recover deficits from previous years. Those NHS bodies with the most severe financial problems may have to reorganize their services to achieve this. It is clear, furthermore, that NHS bodies are facing major financial challenges as a result of a series of substantial reforms in the NHS: such as the introduction of new contracts of employment for most NHS staff ; the National Programme for IT in the NHS; and the implementation of Payment by Results.
The report makes a number of recommendations on how financial management in the NHS could be improved to help meet these challenges: ranging from how Boards can improve their financial understanding and provide more effective challenge to better budgeting and forecasting.
“Financial management is now a matter of major concern for the NHS. The Department’s welcome policy of greater transparency on financial matters means that many of the old practices which obscured the year-end financial position are no longer possible. We can now see where the real financial problems lie which is the first important step on the way to addressing them. Important reforms like Payment by Results and the new financial regime for NHS Foundation Trusts are also increasing the risks and demand first class financial management. All NHS bodies need to reassess their own financial management arrangements in the light of this report. We will help in that process. For the first time our auditors will now score PCT and NHS Trust financial management arrangements and show clearly what needs to be done to secure improvement.”
NAO head Sir John Bourn said today:
“2003-04 was a relatively stable year in terms of challenges facing NHS financial management but, even so, a number of bodies clearly found it difficult to manage their resources effectively. The major developments taking place in 2004-05 and beyond will pose unprecedented challenges with which all bodies in the NHS will have to deal.
“The NHS faces the considerable task of improving its financial management to meet the new challenges. Both the NAO and the Audit Commission are committed to supporting the NHS in this task.”
In 2003-04 auditors gave unqualified audit opinions on the truth and fairness of the accounts of all Strategic Health Authorities, Primary Care Trusts and NHS Trusts. The NAO’s Comptroller and Auditor General was therefore able to give an unqualified opinion on the truth and fairness of the summarised accounts of these bodies.
Furthermore the appointed auditors gave unqualified opinions on the regularity of expenditure on all of the Strategic Health Authorities’ and Primary Care Trusts’ accounts, except for 53 Primary Care Trusts in 2003-04. These qualifications arose because of 42 breaches of resource limits and 13 instances of other irregular expenditure (two of these accounts were qualified both for resource limit breaches and for incurring other irregular expenditure). However, NAO head, Sir John Bourn, did not qualify his opinion on the summarised accounts of Primary Care Trusts, since there are no overall resource limits for the aggregate expenditure of these organisations. He also gave an unqualified regularity opinion on the summarised accounts of Strategic Health Authorities.
Financial performance in 2003-04
The aggregate underspend for all NHS bodies was £72 million (0.12 per cent of total expenditure) compared with an underspend of £96 million (0.18 per cent) in 2002-03. 106 NHS bodies (18 per cent) failed to achieve in-year financial balance, compared with 71 (12 per cent) in 2002-03. 24 per cent of NHS Trusts did not achieve break-even and 14 per cent of Primary Care Trusts failed to keep expenditure within their revenue resource limit. In most cases the deficits were small both in absolute terms and in proportion to turnover.
A small number of NHS bodies are struggling to manage large deficits. The number of significant in-year deficits (of over 0.5 per cent of income or available revenue resources) increased to 13 per cent (from 8 per cent in 2002-03). 12 NHS trusts reported a deficit of over £5 million in 2003-04, compared to seven in 2002-03. Four Primary Care Trusts had revenue resource limit overspends of over £5 million compared to three in 2002-03. The number of bodies with significant deficits and the size of those deficits would have been greater without specific financial support either from Strategic Health Authorities or centrally.
No Strategic Health Authority reported revenue overspends in 2003-04. However, Strategic Health Authorities have a target of delivering financial balance in aggregate across the NHS bodies within their area. Seven Strategic Health Authority areas reported an aggregate overspend in 2003-04 compared with six in 2002-03.
Key themes for improved financial management
The NAO and Audit Commission looked at four key financial management themes and made specific recommendations to aid improvement aimed at both the Department of Health and individual NHS bodies.
The four themes are: the role of the board in improving financial management; improving forecasting of the year-end position; the earlier production and audit of the annual accounts; and increasing the transparency of financial reporting.
Financial issues arising in 2004-05 and beyond
There are a significant number of financial management issues that NHS bodies faced for the first time in 2004-05.
Some NHS bodies have experienced increased financial pressures in 2004-05, with auditors currently reporting concerns about financial standing at 32 per cent of NHS bodies and the NHS as a whole forecasting a small financial deficit. The Department is estimating that at least 12 Strategic Health Authority areas will report an aggregate overspend in 2004-05, compared with seven Strategic Health Authority areas in 2003-04 and six Strategic Health Authority areas in 2002-03.
The creation of the first foundation trusts from 1 April 2004 and the need for services to be commissioned from them using Payment by Results has meant that NHS bodies are having to change the way they operate financially. They will in particular have to enhance their risk identification and forecasting skills. These changes will support the Department’s wider agenda for system reform which the Department expects will offer the potential for improved performance.
The introduction of new contracts of employment and the National Programme for IT are also placing pressure on scarce resources. The new consultants’ contract caused particular difficulty in 2004-5 and the Department has made extra money available in 2005-6 to meet the pressures.
Hard copies can be obtained from The Stationery Office on 0845 702 3474. The Comptroller and Auditor General, Sir John Bourn, is the head of the National Audit Office which employs some 800 staff. He and the NAO are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources.
National Audit Office press enquiries:
Barry Lester, Tel: 020 7798 7937
Mobile: 07748 181692
The Audit Commission is an independent body responsible for ensuring that public money is spent economically, efficiently and effectively, to achieve high quality local and national services for the public. Our remit covers around 11,000 bodies in England, which between them spend more than £180 billion of public money each year. Our work covers local government, health, housing, community safety and fire and rescue services.
As an independent watchdog, we provide important information on the quality of public services. As a driving force for improvement in those services, we provide practical recommendations and spread best practice. As an independent auditor, we monitor spending to ensure that public services are good value for money.
For further information about the Audit Commission, visit our website at http://www.audit-commission.gov.uk/
Audit Commission press enquiries: Nigel Watts, Tel: 020 7166 2129James Strachan, Chairman of the Audit Commission
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- ISBN: 103285172 [Buy a hard copy of this report]
- HC: 60-I 2005-2006