Just where did these deficits come from?
EXPLAINING NHS DEFICITS, 2003/04 - 2005/06
A Detailed Summary of the Key Findings and Lessons
Facts:
• The NHS reported an aggregate deficit in 2004/05 following four years in which it ran a small surplus. The in-year deficit persisted at a similar level in 05/06.
• When aggregate deficits emerged in 2004/05 they tended to be concentrated in a cone-shaped area above a line from Bristol to Southampton and below a line from Bristol to the Wash, whereas in 2003/04 deficit areas are more equally distributed across regions.
• Deficits are a problem for a minority of NHS organisations – 36% were in accumulated deficit in 2005/06. When organisations’ balances are combined to create health economies defined on the basis of patient flows, a larger share is shown to be in accumulated deficit – 48% in 2005/06.
• A growing heterogeneity of financial outcomes has been observed. About 90 health economies have an increasing deficit in 2004/05 but also about 50 health economies have an increasing surplus.
• Amongst PCT Health Economies with deficits over 5% of PCT allocations, the share of the Health Economy deficit with the PCT is 75% whereas in all other deficit PCT Health Economies the share is significantly less.
• Rural areas are more likely to be in deficit.
Why then did deficits erupt in 2004/5?
The allocation of income for PCTs in 2004/5 was known in December 2002, so the deficits did not arise from an unanticipated loss of income but must have been due to either unanticipated or “optimal†high expenditure. Not due to the new resource allocation model in 2003/4. The explanation of the NHS deficit in 2004/5 appears to lie either with accounting changes or on the expenditure side of the budget for these low-needs areas, although a very small (under 10%) of the new deficit pattern may have arisen from the new allocations.
Important information relating to the use of capital to revenue transfers is missing and/or that unobserved management quality amplifies the impact of the factors for which reliable evidence exists.
HM Treasury introduced a new system of government accounting in 2001/2, and while the DH was allowed dispensation to delay its full introduction from 2003/4 until 2004/5, DH has sought to eliminate various opaque accounting practices. The issue that appears to have been of particular consequence is the amendment of arrangements which permit virement from capital to current accounts i.e starving investment to support operations.
The accounting practice change effectively withdrew between £200-300 million that had in 2003/4 been available for current expenditure. In some PCTs this would amount to as much as 1% of their projected expenditure.
NHS organisations were obliged to undertake additional expenditure in 2004/5 to achieve a range of targets designed to improve patient welfare, and that the NHS was unable to address these objectives by “doing things differently†or reallocating resources provided by the HD from other specialities, but instead increased expenditures on inputs- largely staff, to meet these objectives. The difficulty here is not so much targets per se but the unequal distance to target in different areas that was not recognised.
Modelling the implied costs of one of the targets – four hours waits in A&E - Most of the money had already been spent by 2004/5 and the large number of extra staff were still on the payroll. In 2003/4-2004/5, the mean PCT achieved a 4.4 percentage point improvement in the proportion of A&E patients seen within four hours and that this may have impacted on expenditure as much as £1.1 million per PCT with additional national estimated expenditure of about £330 million.
Employment growth at 128,000 FTE staff refutes the suggestion that the incremental resources have merely provided higher wage rates. Slower growth of employment prior to 2004/5 would have allowed reserves to have been built up & allowed flexibility of options. But the pressure of targets did not allow such caution.
The National Plan and Manifesto promises of rapid employment growth were not followed by the promised productivity increases. The financial and human resource decisions in NHS organisations have not been well joined-up, which undermined both productivity gains and the maintenance of financial balance.
A critical influence on decision taking appears to have been the concern that resources might be lost if not spent within the financial year (use it or lose it); and to spend a significant sum quickly normally resulted in recruitment. The one year time horizons do not allow for rational budget planning and favour the quick fix of recruitment, rather than the design of new approaches to treating patients.
Poor financial management is almost an inevitably found to be present in the event of a large deficit, but that poor management is not necessary for large deficits since some poorly managed organisations do not have large deficits. Managerial capacity interacts with and magnifies the impact of the (unevenly distributed) factors.
The £13 billion increase in resource to 2004/5 greatly expanded the available opportunities, but the combination of major policy pressures and workforce targets, set in a context of organisational turbulence as commissioning powers were devolved from HAs to PCTs, and SHAs restructured, provided a context in which the probability of financial control withstanding the various pressures and achieving balance, was diminished.
Deficits became more common in the South and East. National targets gave quite uneven “distances to travel†in different parts of the country. In the low age-needs areas – frequently in the South and East - there was a greater “distance to travel†for 5 of the 11 secondary sector targets – including inpatient and outpatient waiting and the A&E four hour wait, and no correlation for the other secondary sector targets. Emergency admissions growth was higher in low age-needs areas. Moreover, given that primary sector QOF payments were also higher in low age-needs areas, these incremental costs were largely higher in low age-needs areas.
The consequences of the change in accounting practices and in particular capital to revenue transfers were also more likely to have been more important in the South/East and low age-needs areas. These impacted in 2004/5.
A third influence on the advent of regional patterns concerns the cost of living in London and parts of the South and East, and the need to use agency staff due to inadequate pay for permanent staff.
Finally, noting the large share of PCT as opposed to NHS Trust deficits that arise in the highest deficit health economies (>5% of allocation) all of which are located in the Southern half of England. This may indicate that PCT management in the low age-needs areas was less strong than that elsewhere and when exceptional financial pressures were applied in 2004/5, were less able to avoid financial difficulties. (Seems unfair to me, why would southern PCT staff be less capable than northern ones)
It was not anticipated how far national targets would impose unequal burdens in different regions of the country. Should unequal national targets have received differential funding. If the funding model is already reflecting patient “needs†and the costs of meeting those needs, in a symmetric way to that in other regions, then the answer should be no.
But then you have to ask whether targets should be appropriate to local circumstance, and acceptable costs of adjustment.
How far needs based on usage can be accurately modelled, if in different parts of the country, the secondary sector is offering quite different standards of service and thus attractiveness to patients in areas such as A&E.
High deficits in the more rural areas need further study.
Local health economies in surplus tended to have older building stock & how they will invest in new facilities in the new regime needs study.
March 14th, 2007 at 8:41 am
[...] £70 million is actually a smaller component of PCT deficits than other causes as explained previously. 9. Comparisons between Primary Care Trusts suggest that many could reduce their out-of-hours costs [...]