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NHS finances: A breakdown of trusts

Stories of the National Health Service’s collapse into financial chaos were
being published on an almost daily basis earlier this year. The gravity of the
problems soon gained its first scalp when NHS chief executive and permanent
secretary to the Department of Health, Sir Nigel Crisp, fell on his sword in
March, acknowledging his “accountability for problems” on the way.

Before doing so, Sir Nigel tried to lay much of the blame at the feet of
finance staff when he said “poor financial control” was the reason for the mess
the NHS had found itself in. Finance directors were, once again, in the firing

Financial Director has spoken to several NHS finance directors over the past
few weeks to get their side of the story – and it seems the problem is far more
deep-rooted than a few lazy accountants failing to add up correctly.

“The real issue is that the health economy at Sussex and most of the south of
England has been in difficulty for some time,” says the FD of the former Surrey
and Sussex Strategic Health Authority. “There’s been a significant underlying
financial problem here for some time, for all sorts of reasons.” Surrey and
Sussex has the largest deficit of all NHS trusts with debts of more than £40m.
However, it started in deficit when it was formed from the merger of two
hospitals in 1998.

Early diagnosis

The origins of the financial problem, according to the FDs we spoke to, can
be traced back to Labour’s ten-year NHS Plan announced by Alan Milburn to a
sceptical public on 27 July 2000. This would be Tony Blair’s legacy: 7,000 new
hospital beds; 100 new hospitals; vastly reduced waiting times; 7,500 more
consultants; 2,000 additional general medical practitioners; 20,000 extra
nurses… the list went on and on.

The ambitious plan would be funded by re-routing huge amounts of public money
into the NHS, and this was reflected by huge budgetary increases over the
period: the Department of Health resource budget in 2000-01 was just £45bn, but
by 2004-05 this had climbed to almost £67bn, and by 2007-08 – when the budget
growth finally slows – it is expected to be £87bn. But this, in itself, creates
a problem.

“Although it’s undeniable that the NHS over the past five or six years has
received the most generous level of funding, that has created problems because
the department was always able to say that there was more than enough money to
do just about everything and anything they may want,” says the Surrey and Sussex

This became evident when we approached the Department of Health for comment.
“Resources4 available for the NHS have doubled since 1997 and will have almost
tripled by 2008,” a spokesperson said.

The strategic vision at the pinnacle of the Department of Health seems
surprisingly basic: throw vast amounts of money at the NHS and hope for
everything to be alright. “One of my biggest criticisms of the Department of
Health, and why I think it shares a lot of blame for what’s currently happening,
is that the NHS plan was never costed,” says the FD.

It is an opinion shared by the former deputy FD of an NHS trust in the South
of England who acted as an interim manager in both acute and primary care
trusts. She says that although consultation did take place, it never went far
enough – and, as a result, there were vastly different costs when projects got
to their implementation stages. “On a day-to-day basis, you get asked to
estimate figures for things on a very frequent basis,” she says. “[But] you’re
generally given a turnaround of 24 hours and there’s a lot of difference between
making an estimate on one side of A4 and then implementing something like the
consultants contract or junior doctors’ hours.”

The NHS is the third-largest employer in the world (only the Chinese Red Army
and the Indian Railways employ more people) so staff costs account for a huge
proportion of overall expenditure – and contributed a great deal to the
situation the NHS now finds itself in. “It’s one of the biggest [causes] of the
current financial climate, of why some organisations are so desperately in
deficit,” she says.

Power struggle

Because the NHS is such a huge organisation, the power struggles between
departments and interested parties can be immense, and never was this more in
evidence than when the consultants contract was negotiated. The British Medical
Association did a fantastic job for its members in pushing for higher and higher
pay for senior doctors at acute trusts. It did a similarly good job with GPs.
However, the effect was to put a far greater strain on strategic health
authority finances – a cost that the Department of Health simply hadn’t
accounted for when it pledged the extra staff.

In effect, although the department had promised thousands more consultants,
GPs, nurses and other front line staff, they actually had little idea how much
this was going to cost. “There were no pilots for most of the new employment
contracts – they just launched straight into it,” she says. Whatever the reasons
for this, whether it be political pressures or a sheer lack of foresight, it set
in motion a series of events which would put an intolerable strain on the NHS.

“Although it’s undeniable that there have been huge improvements in services
over the past five years, particularly in terms of huge reductions in waiting
times, that has all come at a significant cost,” says the Surrey and Sussex FD.
“And when you add to that the cost of paying for various other things I think
that the experience of all FDs is that, as generous as the public sector is,
it’s actually got nowhere near close enough to meeting all of the additional
commitments that have been placed on the NHS.”

There are many other reasons for why the NHS finds itself in the financial
quagmire it does today (in June, health secretary Patricia Hewitt announced a
net deficit across NHS trusts of £512m, discounting those trusts which recorded
a surplus, the overall deficit of the 174 trusts that ended the year in the red
came to a staggering £1.3bn) and the failure to properly cost the original
ten-year plan was one.

What a waste

But the finance director of a PCT in the east of England points to other
examples of avoidable waste within the NHS. He is in charge of a PCT with an
annual budget of £200m – 15% of that budget is taken up by prescription costs
(effectively the costs associated with providing prescription drugs that doctors
and dispensing chemists then pass on to the public).

He says that the more popular prescription drugs come either branded or
non-branded with the only difference being, apart from some fancy packaging, an
even fancier price tag. The problem he faces is that doctors who own their own
dispensing chemists (of which there are many, although far more common in rural
areas) will order the more expensive branded variety because the mark-up is
greater than non-branded, resulting in higher earnings for them, but a greater
cost to the NHS. The finance director claimed not to have the power or authority
to become involved and block doctors ordering certain makes of drugs, even if a
perfectly good, and far cheaper, alternative is available.

Another contributor to NHS cost is the recently established
payment-by-results regime where hospitals and other health providers are paid
for the services they provide, rather than being handed a fixed budget. The idea
behind this is reasonably sound: it’s easy to fritter away money if you don’t
have to prove how you spent it. Unfortunately, it did not have the desired

The deputy FD from an acute trust explained how it can go wrong: “It
incentivises acute hospitals to do as much work as they possibly4 can because
they get paid on a case-by-case basis. PCTs have got fixed budgets and can’t
afford to pay for all of that work to be done.” She says there were instances of
acute trusts doing the same amount of activity, but trying to claim more for it
because they could effectively prove how much they had done.

When the Department of Health issued guidelines for payment by results, it
had a section specifically focused on ‘gaming’ by acute hospitals, to make sure
that they were all playing by the same rules. “What PCTs have to do is say
‘well, actually, we think you’ve been doing this activity all along, you’ve
previously done these for £2m, now just because you’ve suddenly counted 150 of
them doesn’t mean you can charge us £3m for them’. There are examples of this
having happened,” she says.

Falling morale

There are many reasons why NHS trusts find it difficult to make ends meet as
it is, but when you take into account the (“bloody stupid”) fact that deficits
recorded in one year must be taken off the following year’s budget, it is hardly
surprising that so many NHS trusts have found themselves in a financial quick
sand they simply can’t get out of – and morale is dropping like a stone.

This morale is certainly not helped by the relationship strains between NHS
organisations (one FD described it as the ‘National’ having been taken out of
the NHS). “Certainly, where I was, the relationship between the acute hospital
and the PCT and between the PCT and the GPs was absolutely dire; not very grown
up at all,” she says. “One of the problems is that PCTs have been through such
rapid change, restructuring and political interference – some sort of change
every couple of years – that they’re not very mature operations, whereas the GPs
have been around for ages, they all know each other, know who to talk to, who to
follow. Acute hospitals are much more stable and, therefore, much more effective
to fight their corner because they’re not worrying about their jobs all the

So, the NHS found itself in the situation where the 303 PCTs (in effect, the
guardians of that £70bn budget, responsible for allocating cash to health
providers) were far less powerful than the organisations they were providing the
cash to – a recipe for disaster in organisations of any size and in whatever
industry, private or not.

The government’s answer? More reform. To be fair to the Department of Health,
the reforms the NHS is currently in the midst of, look like a step in the right
direction. The 303 PCTs are being reduced by half in October, with the aim of
increasing their power so that they can stand up to the acute trusts more
effectively. And the number of strategic health authorities were reduced from 28
to 10 in July in a move with similar motivations, along with the hope of cutting
complexity and, one assumes, overheads. But while this may be a strategically
sound plan, hundreds of finance professionals are likely to be out of work.

Bitter pill

But, will it work? Many FDs we spoke to believe that the NHS is on borrowed
time: “I think if the NHS, as a whole, doesn’t deliver something close to
breaking even this year – and my own personal view is that it doesn’t have much
chance of doing that – then, politically, that’s going to be very damaging and
they would be forced to do something quite fundamental,” says the Surrey and
Sussex FD.

The NHS’s financial prospects are not helped by the rather frightening
prospect of a radical slowdown in budget growth after the 2007-08 financial
year. “People have known about it for a very long time, so they should be
prepared, but if general inflation keeps rising as it is at the moment, the cost
pressures that all NHS organisations face, in terms of wage pressures, will just
eat up all of that money straightaway,” says the deputy FD.

An NHS spokesperson defends the record of the NHS and claims that the
department is on course “to deliver financial balance by the end of 2006-07”.
“Independent government auditors agree with us that there is no single, simple
cause of deficits and no single simple solution,” the spokesperson added.

But from speaking to finance directors working at the front line of NHS
reform, it seems the financial crisis has been brewing for years. In fact, the
FD of Surrey and Sussex claims that the only reason we have not heard about it
earlier is because the NHS has been turning to “non-recurrent” means over the
past few years to balance its books. Capital funds, in particular, have been
used to strengthen the NHS’ revenue position – with hundreds of millions of
pounds worth of one-off land sales standing out in particular.

“The fact they’ve done that has disguised what the underlying problems are,”
he says. “For it then to be portrayed as poor financial management and a
breakdown in financial control I think is, to say the least, disingenuous.”

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Philip Hammond