Feature / A Good Result

NHS trusts and primary care trusts have returned their best financial performance yet, as measured by the Auditors’ Local Evaluation results for 2007/08. The Audit Commission’s Andy McKeon provides the expert commentary.

If like me you have been sweating over summer GCSE and/or AS/A level results you will know the tension of the morning of the announcement, waiting for the phone call or text. For reasons that I haven’t quite fathomed, bad news (sorry, less good news) tends to be filtered through the children’s mother. Happily, this time there was no need for an intermediary, so we could all relax and return to the business in hand.

The Auditors’ Local Evaluation (ALE) results aren’t quite like that. They are a bit more like course work, but I expect there is still a little tension and strong interest in knowing how everybody else has fared, even if this is the third year of results.

And very good results they are. The overall picture is one of significant and continuous improvement (fig 1)

Performance improved strongly in 2007/08. The most common score for NHS organisations overall is now level three, performing well. The improvement is all the more impressive given the fact that the strongest performing NHS trusts have become NHS foundation trusts (FTs) and are not subject to ALE assessments. PCTs’ performance improved strongly in 2007/08, virtually eliminating the gap between PCTs and NHS trusts. PCTs and ambulance trusts have overcome the effects of reconfiguration in 2006/07 and have caught up their colleagues, establishing and embedding much better arrangements for the use of financial resources.

The fact that nearly all NHS bodies returned to financial balance was obviously a factor in this. But performance in every one of the five themes improved, not just in financial standing, and there is a clear link between those scoring well on the financial management and value for money themes as well as on financial standing (see fig 2). Of the 170 organisations that achieved either a level three or level four in both financial management and value for money, 151 (89%) achieved level three or level four in financial standing.

There is also a link between good financial management as demonstrated by ALE results and good quality services for patients. In 2006/07 91 NHS trusts and PCTs were performing well or strongly in their use of resources under ALE. Two-thirds of those organisations also scored good or excellent for their quality of services in the 2006/07 Healthcare Commission Annual Health Check. I don’t expect that the picture in 2007/08 will be any different.

Key results from ALE 2007/08 include:

• 93% (282) of NHS bodies met or exceeded minimum standards for their overall use of resources.
• 50% (151) of NHS bodies were assessed to be performing well or strongly in their use of resources.
• 5% (14) of NHS bodies were assessed to be performing strongly – the highest level.Bromley PCT, winners of last year’s HFMA financial management award, sponsored by the Audit Commission, became the first organisation to score a four in each of the five themes (and, no, before suspicious minds get to work, the Bromley PCT auditors were Baker Tilly, not Audit Commission staff).
• Only 7% (20) of NHS bodies failed to meet the minimum standards. The reasons for failure were a combination of inadequate financial standing and financial management arrangements.
• There was the usual snakes and ladders – but many more ladders than snakes. The majority of trusts and PCTs moved up, with seven organisations improving their overall score by two levels. This is particularly hard as the processes and approaches need to be embedded to get to a level three or higher. Only six organisations dropped a level, and none by two.
• Mental health and learning disability NHS trusts performed better than other sectors across all five themes. This has also been the case in the previous two years of ALE.
• Performance across the themes was also fairly consistent, with the notable exception of financial standing. In this theme, 33% of NHS bodies were assessed as performing strongly, compared to an average of 4% for the other themes.
• Performance varied across England (see fig 3). The NHS bodies in North West SHA achieved the highest average score overall. The average overall score of NHS bodies in Yorkshire and the Humber SHA was lowest, so the Roses rivalry can take on a new twist. NHS London has the highest proportion of NHS bodies performing strongly but it also has the highest proportion failing to achieve minimum standards – but, as befits a great capital city, London has always had a tendency to display the best and the worst of everything.

Room for improvement

The message from the bottom end of the scale is that it is possible to change with the right approach. The four organisations that failed to meet minimum standards across all five themes in both 2005/06 and 2006/07 have improved, with only one of the four not rising to level two in 2007/08, and then only by virtue of a score of level one for the financial standing theme. Just one NHS body, Barking, Havering and Redbridge Hospitals NHS Trust, failed to meet minimum standards in any of the five themes, which was a deterioration in performance from the previous year.

But, there are six organisations still struggling to score more than level one for each of the three key themes. Five of these organisations also failed to do so in 2006/07 and four in 2005/06. This contrasts poorly with the organisations that failed across all five ALE themes in previous years, which all improved in 2007/08. They are among the 12 that have had an overall score of weak in the three years of ALE, although some of these show clear signs of escaping.

2008/09 will be a challenging year for finance departments with a more demanding accounts timetable under the Department’s faster close programme, including a hard close at month nine, and preparation for the introduction of international financial reporting standards (IFRS) the following year. But on the evidence of ALE, many are already well placed. The majority of NHS bodies successfully achieved level three in the financial reporting theme, showing that they were addressing the implications of IFRS and had good quality and timely accounts. Only 23 bodies scored a one on the key financial reporting key line of enquiry (KLOE1.1 relating to accounts production).

So what are my conclusions from this year’s results? First, that there has been a clear improvement in financial management in the NHS. I hope it marks a sea change, but we possibly need one more year’s results to be sure of that. The move from overall deficit to a planned surplus was certainly no fluke and wasn’t simply dependent on extra money being available. It owed a lot to improved processes, and, if I may say, to increased professionalism.

Much of the credit must go to finance staff. But, ALE has helped in that process. In an independent survey of 140 trusts and PCTs on behalf of the Audit Commission earlier this year, 87% considered that ALE had had a fair or a great amount of impact in improving local public services and the management of local public services. That result is similar to an HFMA survey last year where 79% of finance directors responding thought that ALE had led to improvement in financial management and financial performance.

Our survey also showed that the dissemination of good practice that has been identified during the assessment would help further. Auditors have, therefore, identified a substantial body of notable practice case studies that other NHS bodies can learn from. There are now a number of examples of notable practice on the Audit Commission’s website. We will also be providing briefings on faster close and IFRS issues, starting by setting out the lessons to be learnt from the 2007/08 accounts and early work on IFRS.

The ALE process will be changing in 2008/09 to reflect the introduction of Comprehensive Area Assessment by the Audit Commission and other inspectorates and to continue the link with improvement. The Use of Resources score will remain. However, for PCTs, the scoring framework will be based around three themes, rather than the current five and be more demanding overall. We will shortly be issuing detailed guidance on how auditors should approach the new themes. For NHS trusts, the current KLOE-based framework of five themes has been updated to incorporate an emphasis on the financial risk rating measurements used by Monitor to assess foundation trusts. This will provide continuity as well as a sterner test for aspiring FTs.

My final thought is that the NHS is now in a much better place to meet the challenges of tighter public spending settlements and of implementing the Darzi report and to use the resources available to it to improve services to patients, which, after all, is the real purpose of improving financial management.

                    Fig 1: overall UoR scores for PCTs and NHS trusts

                Fig 2: performance by theme 2006-2008

                    Fig 3: overall Uor scores by SHA

Andy McKeon is managing director, health, at the Audit Commission. The briefing and notable practice can be found at www.audit-commission.gov.uk/ale