News / News Analysis: Staying afloat

With all the talk recently of reduced growth, pay freezes and a four-year tariff in which the scale of efficiency savings needed will be detailed, it is easy to forget that the finances of most NHS England organisations are in rude health. Quarter one figures show the service forecasting an aggregate surplus for 2009/10 of almost £1.5bn – or
more, once foundation trust surpluses are taken into account.

However, there are some caveats and warnings when the detailed picture is examined.

The Department of Health’s The Quarter report shows the NHS in England is forecasting an overall surplus of nearly £1.5bn this year – accounts for 2008/09 show a year-end surplus of £1.7bn.

The Department said this figure, which excludes foundation trusts, represents just over 1.6% of total revenue resources and meant that the service is expecting to use fully the baseline and additional resources allocated for 2009/10, together with just over £260m of the surplus brought forward from 2008/09 – the service has been allowed to spend £800m of last year’s surplus over two years. All strategic health authority areas are forecasting an overall surplus (see table).

This healthy position has been delivered against a background of continuing to meet the 18-week referral to treatment target, which came into effect from January 2009, and reducing by 39% MRSA infections compared with the same quarter last year.

David Flory, the Department of Health’s director general of NHS finance, performance and operations was pleased with the figures.

‘The quarter one report shows that the NHS has made an excellent start to the year by meeting key priorities over the last quarter during a period when they were dealing with the added pressures of swine flu,’ he said.

‘A strong financial position, backed by good progress on delivery, will continue to ensure high-quality services for patients, despite the current economic climate.’

Monitor said foundation trusts recorded an actual net surplus of £111m in the first three months of the financial year, before exceptionals. This was £20m over plan and driven by income generation that was £96m above plan. The regulator said the increased income was linked to higher referral rates and activity to meet the 18-week referral-to-treatment target, together with higher than expected A&E attendances.

Foundations’ operating costs were £77m above plan, reflecting the increase in activity and the need to use agency and bank staff to fill rotas. Their aggregate EBITDA margin increased to 7.5%, marginally less than the 7.6% rate in annual plans. Foundation trusts’ aggregate cash balance was £2.7bn. This was £58m below plan and was primarily due to net outflows in working capital offset by slippage in capital expenditure (£84m).

Monitor acknowledged the slippage in capital spending was due to design delays, postponement of site development and delays caused by the economic environment.

Despite the generally rosy picture, an increasing number of NHS organisations are reporting financial difficulties. Nine non-foundations predicted an operating deficit at the end of the first quarter, with a combined forecast operating deficit of £85m. Three of these trusts were classified as underperforming in the new NHS performance framework (see box).

At the end of 2008/09, seven organisations reported a year-end operating deficit, totalling £60m. At this point in 2008/09 five bodies were forecasting an operating deficit.

In addition to the forecast gross operating deficit, there is a forecast gross technical deficit of £275m across 26 trusts – three also have an operating deficit. This issue is becoming more widespread – at the end of 2008/09 10 organisations said they had a gross technical deficit of £62m – and relates to the impairment of fixed assets and/or the revenue costs of bringing private finance initiative assets onto the balance sheet.

This year marks the deadline for organisations to revalue assets using the modern equivalent asset basis for valuation, so the number of organisations reporting a technical deficit could rise again in the second six months as they complete their valuations.

The Department does not believe an impairment charge should be considered as part of an organisation’s operating position. And it says the incremental revenue expenditure after bringing PFIs on balance sheet – following the implementation of international financial reporting standards – should be reported as technical as it has no cash impact and is not chargeable for overall budgeting purposes.

Some foundation trusts were also found to have financial difficulties. While 95% of foundations had a financial risk rating (FRR) of 3 or above at the end of the first quarter, four trusts were rated 2. And two foundation trusts – the Royal National Hospital for Rheumatic Diseases and Heatherwood and Wexham Park Hospitals – had an FRR of 1, the lowest rating. Monitor is working with these trusts to address their difficulties.

For the time being, the headline figures look good. Many of the trusts forecasting a deficit this year have long-standing financial problems and solutions are being sought. The Department will be hoping finance managers continue to exert this high level of control when public spending tightens.

FRAMEWORK HIGHLIGHTS FINANCIAL UNDERPERFORMANCE

The Quarter also included for the first time results for acute and ambulance trusts under the new NHS performance framework.

The framework, which builds on the financially challenged trusts (FCTs) regime, was launched from the start of this financial year and the Department of Health intends to roll it out to primary care trust provider arms and mental health trusts soon. Commissioners are due to be assessed from next April.

The framework will inform the new regime for unsustainable providers, due to be launched next

April. This will be triggered in cases of consistent underperformance or where a provider is found to be clinically or financially unsustainable, and could lead to the imposition of new management teams or a merger with another provider.

The performance framework found 58 trusts were ‘performing’, 26 trusts were assessed as ‘performance under review’ and eight trusts (all acute providers) were deemed to be ‘underperforming’.

Five of these trusts scored an ‘underperforming’ rating in finance. These are Barking, Havering and Redbridge University Hospitals, Hinchingbrooke Health Care, South London Healthcare, the Lewisham Hospital and West Middlesex Hospital.

All five – or their predecessor trusts in the case of South London Healthcare – were classified as financially challenged trusts (FCTs), although the West Middlesex trust lost its FCT status last year.

There are five financial indicators and trusts are scored one to three (with three being the best score). The forecast outturn indicator is given the greatest weight, reflecting the Department’s drive to improve forecasting.

The Department said it would be seeking assurance that strategic health authorities and primary care trusts have taken appropriate steps to engage with those organisations categorised as being ‘underperforming’ and with ‘performance under review’.