News / Getting behind the surplus

News analysis
By Seamus Ward

Whether it was Northern Rock, allegations of irregularities in political funding or lost computer disks, autumn has seen the government on the back foot. Many commentators believed the NHS in England would create more red faces when it produced its month-six forecast of its year-end financial position – not because it would show a deficit, but because it showed the service had underspent.

In the end, the NHS surplus was edged out by the other stories, but taxpayers will be asking, ‘What’s going on?’ In two years, the English NHS has moved from an aggregate deficit of £500m to a potential surplus of £1.8bn. Of course, funding has increased and no one would argue that a deficit is better than a surplus, but the layman may conclude the NHS is over-funded.

The truth is a lot more complex than that, of course, and a number of factors are affecting NHS organisations’ balances as well as their ability to spend.

Returns for quarter two of 2007/08 show a forecast underspend of £1.789bn, against a projected £983m surplus in the first quarter and a £515m surplus at the end of 2006/07. These figures do not include foundation trusts, which are expected to continue to report aggregate healthy surpluses. At Q2, no strategic health authority forecast an overall deficit; seven said their surpluses would be more than £100m.

David Flory, director general for NHS finance, performance and operations, said the underspend was 2.3% of NHS resources. This represented good financial planning and a surplus was in line with the Department’s financial strategy. He added that three factors were contributing to the forecast surplus.

First, the Q1 figures showed that many organisations were on target or ahead on their cost improvement plans, allowing SHAs to release contingencies they held over and above the required 0.5%. Also, since the Q1 figures were returned, the 2007/08 community pharmacy funding had been agreed, and this had led to a reduction in the reimbursement prices of generic medicines charged to primary care trusts (PCTs). These lower costs had led to higher surpluses. Finally, he said the figures looked better because some organisations that were predicting a deficit at Q1 were now forecasting break-even or a surplus.

The money would not be set aside, but some would be used to accelerate the delivery of the 18-week referral to treatment target and to introduce additional measures to combat healthcare-associated infections.

The money would also be used in 2008/09 to extend the ‘range and reach’ of primary care services. Surpluses were needed to pay for start-up costs and parallel running when moving care into the community and plugging the gaps in primary care coverage.

A look at individual SHAs shows much of the underspend comes from PCTs setting aside money they wish to use in future. Some are using the money as a contingency fund, such as covering the cost of continuing care. Others are aware that the Darzi Next Stage review will be implemented from 2008/09 at a time when funding growth slows, and are taking steps to ensure funds will be available to facilitate these reforms.

Though NHS chief executive David Nicholson memorably told the Commons health committee recently that the surplus was not ‘in a safe’ in his office but held by PCTs, the Department’s figures show the money set aside by PCTs is reflected in SHA balances rather than the commissioners’.

The Yorkshire and Humber health economy has a forecast surplus of £280m, all but £8.5m of which is held by the SHA. NHS London has an aggregate forecast surplus of £300m. The SHA alone accounts for an underspend of £220m.

Yorkshire and Humber’s board papers say most of its forecast surplus comes from PCTs that have voluntarily lodged funds in the SHA’s strategic investment fund.

Eleven of Yorkshire and Humber’s 14 PCTs have made deposits in the fund. Specific terms and conditions will be agreed for each deposit, and each organisation has produced a four-year plan identifying how the strategic investment funds carried forward into future years will be used. The PCTs have earmarked £193m in the fund to spend on service developments, including 18 weeks (£32m), primary care investments (£55m), community services (£34m) and PCT provider services (£17m).

NHS North West is forecasting the largest individual surplus at £350m. A large part of this underspend has been lodged by PCTs in the SHA’s strategic reserve. The SHA says the North West benefited by £32m from the recent reduction in generic drugs prices, but much of the surplus had been generated because of ‘timing issues’ in the delivery of planned investments. PCTs were bringing forward investment plans to reduce the underspend by the end of the financial year.

SHAs insist the money will be spent, but what is the appropriate balance between sound financial planning and giving patients the services they want now? Many would look to the Department’s operating framework for the current financial year, which sets the NHS a target of a £250m surplus. In addition, organisations have been asked to generate a contingency fund of 0.5% (£526m). The reversal of resource accounting and budgeting for NHS trusts required the service to plan for a further £140m surplus. In total, the Department expects an underspend of at least £916m but insisted it was comfortable with £1.8bn.

‘There’s a difficult message,’ said HFMA chairman Chris Calkin. ‘There are still some cost pressures, and what we are achieving this year in underspending is likely to be non-recurrent.’ He said that when the money was spent in future, it could look like a deficit. ‘There needs to be a debate about the appropriate level of surplus, what it can be used for and how you access it. Other than spending on capital, the only way you can access it is by overspending and that sends out the wrong messages.’

Bill Shields, NHS South West director of finance and performance, called on the service to explain why a surplus meant good financial management. ‘We need to articulate better why we generate surpluses and why a surplus is a good thing. What’s it used for? To reinvest in services at some point in future. We can’t return to the situation of two years ago. It might be difficult or uncomfortable to explain a surplus, but it’s nothing compared with explaining a deficit.’

Mr Calkin has warned there was a danger that a significant surplus could create the impression that the health service’s financial challenges were behind it. While the headline figure showed a growing surplus and the aggregate forecast gross deficit has fallen from £204m at Q1 to £201m, more organisations are now forecasting a deficit.

There are 25 trusts forecasting a deficit, compared with 22 at Q1, and 10 of these are among the most financially challenged trusts. The Department said solutions for all 17 financially challenged trusts were being prepared in the context of the 2008/09 operating framework.

There are still pockets of deficit, but most of the NHS has a financial buffer that should underpin the implementation of the next stage of reform. Whether it is too high is a matter for argument, but the chances are the overall surplus will fall in the latter six months of the year as PCTs, in particular, invest in service development. The challenge will be to spend the money wisely – in the right places and at the right times.