Feature / Pressure rising

It has been a turbulent few years for finance professionals working in NHS Wales. As with other parts of the NHS, they are charged with delivering savings, but unlike others they have been achieving 5%-plus for at least four years. But to the dismay of many, this has been overshadowed by reports that break even in 2011/12 was only achieved with bail-outs.

It is true that additional funds have been allocated in-year – more than £300m in the past three years. The reason for the support is clear. Notwithstanding the need to foster disciplined financial management, overspends would be deemed irregular by auditors, who would then offer a qualified opinion on the body’s accounts. This could lead to a qualified opinion on the Welsh government’s financial statements. The Wales Audit Office (WAO) notes it would be ‘uncharted territory’ for the Welsh government and though the consequences are unclear it would, at the very least, damage the government’s reputation.

The controversy over the in-year adjustments could play a part in giving Wales a more flexible finance regime that encourages longer-term planning, with greater certainty about funding levels at the beginning of the financial year.

The Welsh health revenue budget is just under £5.9bn and is a major part of Welsh government spending – about 40% of the Welsh government’s entire revenue budget is spent on frontline healthcare. Health funding will remain relatively flat in cash terms in the remaining two years of this spending review period. In real terms this translates to reductions of 1.5% in 2011/12 and 2.5% in 2012/13, 2013/14 and 2014/15.

However, the funding gap faced by frontline organisations is often greater and finance professionals’ focus remains on the continuing cost pressures faced by NHS Wales. Estimates of required savings vary from £870m to £1bn between 2010/11 and 2014/15 on an annual budget of £5bn. A good start has been made, with local organisations reporting savings of £310m in 2010/11 and £285 in 2011/12. A similar amount is likely to be needed this year.

Finance managers contacted by Healthcare Finance insist attention has shifted to redesigning services to increase efficiency – something the WAO deemed critical in a recent report on NHS Wales finances. Health finances says quick wins have already been recorded and cash-releasing savings must increase.

The WAO believes non-recurrent savings amounted to £38m in 2011/12 (around 10% of savings delivered). While it is encouraged that such a high percentage of the savings are recurrent, it says the level of non-recurrent savings rose towards the end of the financial year. Areas where non-recurrent savings increased most were workforce and procurement, indicating that health boards delayed the replacement of staff, supplies and equipment as the financial year approached.

Despite significant savings, they have not been sufficient to bridge the funding gap, forcing the Welsh government into action. In-year funding top-ups have been a regular occurrence, though not always to target financial shortfalls. While some of the additional funds are planned and some are allocated to meet pressures such as waiting times, in recent years more of the money has been given for the purpose of ensuring health boards do not end the year in the red.

Funding variations

Between 2006/07 and 2008/09 the additional in-year funding varied from 3% to 6% of the initial allocation, much of it to reduce waiting times. In 2009/10, it rose to 13% and was about 9% in 2010/11 (around £110m in both years) – driven again by the need to tackle waiting times. In 2009/10, reserve funds were raided to cover the cost of swine flu, NHS reorganisation and one-off depreciation and impairment charges. But additional funds from reserves were needed to ensure NHS bodies could break even – £70m in 2009/10 and £110m in 2010/11.

The pattern continued into 2011/12, where there was a total funding gap of £466m. Although NHS bodies reported savings of £285m in 2011/12 (£15m short of the savings target), they received an extra £157m in year to address cost pressures and ensure breakeven.

This was made up of several elements. It had become clear as 2011/12 progressed that NHS Wales would need extra funds to achieve its financial targets. So in October 2011, the Welsh government allocated £133m, of which £103m would be recurrent. The £133m was allocated among the seven health boards taking into account the relative sizes of each and the scale of financial ?risk being managed. Particular support was given to Hywel Dda, which has a four-year package of tapering financial support.

In a portent of things to come, Cardiff and Vale University Health Board received £12m as brokerage. The funds increased the board’s revenue resource limit, but unlike previous in-year adjustments, will be repaid. Under the agreement, the board’s revenue limit will be reduced by £6m in both 2012/13 and 2013/14.

At this point, NHS managers were in health minister Lesley Griffiths’ sights. In return for the in-year increases and planned funding rises over the following three years, she expected the NHS to deliver on its financial targets, achieve financial balance by the end of the year and find further efficiency savings.

Even so, in February it appeared several health boards would still not break even, despite the added funding and the significant savings they reported. In response, the minister repeated the offer made to Cardiff and Vale earlier in the financial year. She offered financial support to ensure the boards met their financial duties, but this time it would be in the form of an advance on their 2012/13 allocations.

Three boards took up the offer – Aneurin Bevan (£4.5m), Cwm Taf (£4m) and Powys (£3.9m). As in Cardiff, these advances increased the boards’ 2011/12 resource limits and must be repaid. As well as being barred from using the facility in 2012/13, external reviews of the boards’ financial management arrangements have been commissioned. In return for the brokerage it received, Cardiff and Vale was required to establish and maintain a turnaround team and submit financial and savings plans, including for this financial year.

The Department of Health, Social Services and Children is also working with Betsi Cadwaladr and Hywel Dda health boards to support their financial planning.

The WAO is critical of the previous approach to the provision of in-year support, dubbing the additional funding ‘unsustainable’. It said the culture of providing additional funds made finance managers’ jobs more difficult. The funding, from Welsh government and health department reserves, fostered a belief among clinicians in particular there was a pot of gold waiting at the first sign of pressure.

But the WAO applauds the brokerage. “Clearly the NHS in Wales is facing a very challenging agenda and short-term funding gaps remain a real concern,’ says auditor general for Wales, Huw Vaughan Thomas. ‘In short, even after the very significant savings already made, the status quo is simply unaffordable and there have to be service changes to secure its long-term future. The granting of funding advances rather than year-end bailouts demonstrates the step change adopted by the Welsh government and this, coupled with positive signs the NHS in Wales is prepared to make difficult choices to deliver long-term change, is encouraging,’ he adds.

The report was nothing short of an endorsement of the government’s handling of NHS Wales finances, according to Ms Griffiths. The more flexible system was sensible and sustainable and removed the dependency on end-year bailouts. ‘We’ve always been up front about the challenge our NHS settlement represents and our belief that no area of public service can be spared from trying to find efficiencies,’ she says. ‘We have allocated an additional £288m to the NHS in the current and next two years with the expectation this will put the NHS on a sustainable financial footing while continuing to deliver high-quality public services.’

But while brokerage is more flexible, there are obvious issues. First, the boards that have taken advances have £4m (£6m in Cardiff’s case) less to play with this year. And what happens if they do not break even this year? Will the minister risk qualification of the Welsh government’s accounts, pull a U-turn and allow them an advance on their 2013/14 allocation or revert to the old method of in-year adjustment?

The latter seems unlikely. The minister has publicly backed the brokerage system and accepted the WAO’s recommendations, which includes a proposal to end the requirement for health boards to break even each year (within the current resource accounting framework). NHS Wales’ accounting regime is under review.

Welsh NHS Confederation director Helen Birtwhistle says the service has worked hard to deliver savings that would not affect the quality of services to patients. But she adds: ‘Efficiency savings can only take us so far, and we are reaching the point where the only way we can continue to live within our means, at the same time as improving the quality of care, is to make radical changes to services.’

Capital concerns

Finance professionals say the focus is shifting to the redesign and reprovision of services, but there is a concern this will require capital funding, which is in short supply. Capital budgets have been cut, with real terms reductions of 15% in 2011/12, almost 12% in 2012/13, 13% in 2013/14 and 2% in 2014/15 – and a moratorium placed on the use of private finance. The WAO says the government should work with health boards to identify the capital costs of reform, prioritise funding within available resources and explore alternative sources of funding.

While NHS Wales is taking steps towards a sounder financial footing, some tough decisions will have to be made as the pressure continues to rise.