Health Committee inquiry into NHS deficits
British Medical Association memorandum of evidence
June 2006
Executive summary
- Deficits are not new in the NHS but the size of that projected for 2005-06 is unique in its scale.
- The favourable financial climate in which these deficits are being incurred is causing commentators to speculate on the underlying reasons for the deficits.
- These causes do not appear to be systemic and there is no apparent link between those PCTs in deficit and their distance from resource allocation target.
- Deficits are variously ascribed to local management problems, local health economy issues and the impact of national policies and decisions. In particular, targets and NICE decisions are cited.
- NHS organisations seem to be incurring higher levels of activity than expected and have inadequate risk management arrangements in place.
- Payments under PFI contracts are cited by some trusts as contributing to financial instability.
- Whilst NHS trusts are having to cut back on services, PCTs are still tied into overtly favourable contracts to independent sector treatment centres (ISTC).
- Commentators blaming deficits on unexpected consequences arising from new national contracts for nurses, doctors and others are being overly simplistic.
- There seems little doubt that one consequence of the deficits has been job losses in NHS trusts. The nature and scale of these seem open to interpretation.
Introduction
1. The BMA is pleased to contribute to the Health Committee’s inquiry into NHS Deficits, which is examining the size of and reasons for NHS deficits in 2005-06, the consequences of these in 2006-07 and the period of time over which balance should be achieved. The statistics in this document relate to England only.
Background
2. The forecast outturn for 2005-06 for NHS organisations – strategic health authorities, primary care trusts and NHS trusts – at the mid point of the year was a net deficit of £623 million comprising aggregate deficits of £948 million and surpluses totalling £325 million. As Table 1 shows, deficits are not new in the NHS in recent years but the size of that projected for 2005-06 is unique in its scale. The Secretary of State has been at pains to point out that the projected deficit is small in relation to NHS turnover at less than 1% and that around two-thirds was due to just 37 organisations (7%, of the total number) [Go to note 1]
3. However, the deficits are being incurred in a spending climate which is unprecedented in recent years. The 2002 Budget responding to the Wanless report, provided for a 7.4 per cent real terms increase in UK spending on the NHS up to 2007-08. The Secretary of State has claimed additionally that the Gershon savings are running £200 million ahead of schedule in theory adding to the resources available to the service. This favourable financial climate is causing commentators to speculate on the underlying reasons for the deficits.
Table 1: NHS organisations net deficits and surpluses 1997-98 to date
| Total Net (Deficit)/Surplus (£ million) | |
| 1996-97 | (460) |
| 1997-98 | (121) |
| 1998-99 | (18) |
| 1999-2000 | (129) |
| 2000-01 | 112 |
| 2001-02 | 71 |
| 2002-03 | 96 |
| 2003-04 | 73 |
| 2004-05 | (256) |
2005-06 (Forecast) |
(623) |
Commons Hansard 8 Feb 2006: Column 1319W
The causes
4. The underlying causes of the deficits do not appear to be systemic. There is for example no apparent link between those PCTs in deficit and their distance from resource allocation target (Chart 1). PCTs, which are significantly below target, could find their resources stretched relative to need. Conversely, PCTs over target could find differential increases in resources inadequate to meet ongoing commitments. However, whilst with few exceptions, those PCTS with the largest deficits are over target there is no correlation between size of deficit and distance from target. Neither hypothesis is therefore supported by the data.
5. The King’s Fund [Go to note 2] (using data from the Audit Commission’s annual audits of NHS bodies) attributes deficits to three main causes:
- Local management problems
- Local health economy problems
- National policies and decisions
7. The King’s Fund also identifies changes in accounting practices and financial regimes as having a substantial impact, in particular the introduction of resource budgeting.
Chart 1: PCT surpluses and deficits v distance from target %
8. At PCT level some annual audit letters for 2004-2005 hint at higher levels of activity than expected and inadequate risk management arrangements. Some however suggest underlying problems in the local health economy. It is worth looking at one SHA by way of example. In this SHA – Bedfordshire and Hertfordshire – 11 out of 17 NHS trusts reported deficits in 2004/05 and aggregate deficits totalled £65 million. There were clearly some accounting issues present since the pre-audited position showed deficits totalling £47 million. The position at mid-year 2005 had worsened considerably to a forecast deficit for 2005/06 of £90 million [Go to note 3].
9. Drilling down to trust level, one trust – Bedford Hospital NHS Trust incurred a substantial deficit of £8.5 million in 2004/05 but did meet the other financial targets for the year including remaining within its external financing limit [Go to note 4]. The reasons behind its deficit were diverse:
- Overspent budgets and savings not delivered of £1.2 million;
- The need to continue access spend, and the lack of funding for additional activity £4.1 million;
- Agenda for Change and the new consultants contract were higher than budgeted by £1.3 million, and
- The PCTs and the Workforce Development Confederation did not have the resources to continue the support that had been available in 2003/04 of £1.6 million.
11. Incomes Data Services has analysed the labour market issues around the deficits in some depth and points out that, over the four years to March 2005, paybill per head in the NHS grew at 6.5% per year compared with 5% for the whole public sector - a period covering the implementation of the new consultant contract and additional awards to key nursing staff by the Nurses Pay Review Body. It also points out that there were 45,000 more jobs in the NHS in the 12 months to September 2005. It concludes that, whilst considerable resources had been invested in pay in the NHS over the last few years, most of it was planned to reward nurses and other front line staff and the service has expanded. The paybill and the reasons for its growth it argues should not be used as a scapegoat for financial crisis in the NHS. [Go to note 6]. It remains the case that with average hours of work at around 50 per week and contracted programmed activities (PA) rewarding only 44 of these, consultants continue to prop up an inadequately resourced system at local level.
12. Another driver of deficits for some trusts is the expenditure stream to contractors under the Private Finance Initiative (PFI). This has the capacity to significantly distort trust finances. In its Public Interest Report (PIR) on the Queen Elizabeth Hospital NHS Trust, its auditors highlighted the impact of its PFI obligations on its financial status. [Go to note 7]. The trust’s deficit was some £19.7 million. The fixed amount payable to the PFI partner is approximately £15 million per year, increasing annually with inflation. This amount cannot be reduced, even if activity levels fall significantly. There is also a variable element to the contract which the auditors quote the trust believing to be more expensive than the equivalent cost for a non-PFI trust. In all, the Trust believes itself to be facing excess PFI costs of £9 million. Without this excess, the Trust believes that it would now have a reference cost index of below 100 (the level at which a trust is as efficient as the national average) as against its current 103 – down from 112 over the last four years.
13. Consultants also draw attention to the impact of private sector contracts for treatment on trust and PCT finances. Their fears about the sums earmarked for NHS treatment in Independent Sector Treatment Centres (ISTC) and the poor value for money some of these represent are borne out by the King’s Fund whose trawl through auditors’ PIRs identified contracts drawn up with the private sector to treat patients in order to meet targets as one contributor to trust deficits. Indeed, one trust spent £2 million in one year on private treatment, which accounted for a quarter of its deficit for that year. [Go to note 8]. Whilst NHS trusts are having to cut back on services, PCTs are still tied into overtly favourable contracts to ISTCs, poorly coordinated and inadequately integrated with the needs of the surrounding NHS.
14. Although not directly related to local deficits, the high cost of system reform with its attendant transaction costs allied to substantial central expenditure (as on for example information technology) inevitably reduces the amounts available within the spending envelope for allocations to PCTs and makes it difficult to implement financial recovery plans. Management changes consequent upon reorganisation are also not without cost both direct and through inefficiency.
Consequences of deficits
15. There seems little doubt that one consequence of the deficits has been job losses in NHS trusts. The nature and scale of these seems difficult to ascertain. Evidence collected by the BMA’s Communications Directorate from media reports (Appendix 1) suggests that job losses whether from natural wastage, redundancy or other mechanisms total over 11,000. NHS Employers has dissected press reports covering 3,700 reported job losses ascribing around 600 to actual redundancies [Go to note 9]. A systematic trawl through NHS trusts using the BMA’s Employer database showed that 16 per cent of the trusts for which information was recorded had recently announced job losses. In almost a third of the trusts that had announced job losses, the trust had confirmed that the losses were to include doctor posts. The majority of the trusts losing doctor posts were acute trusts (65 percent, 13/20).
There is also widespread cutting of training. This has involved reducing study leave budgets and freezes on non statutory training. Budgets held by deaneries are also vulnerable with senior figures in strategic health authorities and deaneries being warned that their budgets for 2006-07 are likely to be cut by 10%. [Go to note 10].
For further information, please contact the BMA Parliamentary Unit:
Address: BMA House, Tavistock Square, London WC1H 9JP
Tel: 020 7383 6223;
Email: smarks@bma.org.uk;
Fax: 020 7383 6830
Notes
1. http://news.bbc.co.uk/1/hi/health/4489164.stm .
2. Deficits in the NHS. King’s Fund. London: April 2006
3. http://www.audit-commission.gov.uk/aal/data2006/BedfordshireandHertfordshireSHA.pdf - download as a PDF here
4. http://www.audit-commission.gov.uk/aal/data2006/BedfordHospitalNHSTrust.pdf - download as a PDF here.
5. Public Expenditure on Health and Personal Social Services 2005. HC 736. London: The Stationery Office Limited. May 2006. 132-133
6. Understandable paybill increase in the NHS. IDS Pay Report 949. March 2006. p2
7. Queen Elizabeth Hospital NHS Trust – Public Interest Report. PriceWaterhouseCoopers. December 2005.http://www.audit-commission.gov.uk/pir/downloads/QEHPIR.pdf - download as a PDF here.
8. Deficits in the NHS. Op cit
9. Major 'job losses' in the NHS are misleading, says NHS Employers. Read more here - http://www.nhsemployers.org/aboutus/mediacentre-listing.cfm/pressrelease/96.
10. http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2006/03/25/nhs25.xml&sSheet=/news/2006/03/25/ixhome.html