Don’t be fooled by the surplus…

James Gubb, 7 June 2007

We can all cheer! The NHS is in surplus. Unaudited accounts released yesterday by the DoH reveal an operating surplus of £510m, a miraculous £1.37bn turnaround from the £547m deficit reported last year. Most of the press have, typically, attacked this achievement by reporting the dire consequences – as many as 70,000 job cuts, cut-backs back on elective surgery, cuts to the NHS training budget etc. But the fact is the problem of NHS deficits had to be addressed. The NHS, so long as it has finite resources by virtue of the fact is funded through general taxation, must also have a centrally agreed budget and a principle of cost containment, i.e. that its organisations either stay in surplus or balance.
The real issue is why such deficits have mounted in the first place. This is no easy question to answer, but the root cause almost certainly lies in the structure of the NHS itself.

As a recent report by Reform (January 2007) highlights, ‘the NHS has demonstrated a typical monopoly response to higher resources [you’re tempted to overbuild capacity, add infrastructure, headcount, lots of fixed costs]; the marginal costs of extra activity have been enormous’. Big capital-build programmes have not been justified by their income under payment-by-results, too many extra staff have been taken on with hefty pay increases and are now being laid off, and central targets have seriously distorted clinical priorities. The government have also attempted to micro-manage the adverse results by top-slicing profits made by PCTs that have been financially sound and giving windfall payments in the form of contingency funds to those Trusts that haven’t. Yet this has only served to distort incentives further; Trusts running deficits are in effect rewarded for doing so.
With such perverse incentives in place a big-bang, centrally-directed, purge to remove deficits seems the only response. Yet this surely will also have the most damaging effect on health outcomes and waiting times (the DoH released statistics today for the first time on referral-to-treatment times [RTT], showing only 48% of patients are treated within 18 weeks of being referred to secondary care by their GP).
And such a purge is certainly not a long-term solution. The impressive looking picture of a £510m surplus itself hides the fact that 22% of NHS organisations failed to break even. In fact their combined gross deficit was £911m – not too far down on the £1.3bn of those in the red last year – and 17 NHS Trusts were categorised as ‘financially challenged’ with long-term financial problems. Many of those with significant deficits last year have worse deficits this year.
So what’s the solution? Something that hasn’t been picked up on by any of the media, with the exception of the FT, is the much more impressive performance of NHS Foundation Trusts (FTs). The independent regulator, Monitor, reported yesterday that 54 out of the 59 FTs reported a surplus, the combined total of which was £130m. True, the FTs were the best performing NHS Trusts before they gained Foundation Trust status, but their relative performance has continued to improve. Significantly, they achieved efficiency improvements of an estimated 3% in 2006/07, equivalent to over £270m. This is reflected in the EBITDA operating margin, which improved from 5.6% last year to 6.7%. Forty-four FTs also experienced higher levels of activity than they planned for. By contrast, the supposed efficiency gains across other NHS organisations are not well quantified and are vague to say the least.
Surely some part of the better performance of FTs has something to do with the fact they are free from the direction of the DoH and from ‘performance management’ by SHAs, and are able to determine their own priorities for service provision and development on the basis of demand rather than central diktat. A model that should be followed.