Does it matter if the Department of Health underspends against its annual budget?

You might argue it matters a lot when the NHS needs every penny it can get, and when the department has little leeway to “carry over” underspends from one year to the next. That’s an argument the health select committee has been pondering, following HSJ’s report revealing the DH returned nearly £3bn to the Treasury over the past two years.

‘Individual providers might be free to spend a year’s surpluses in future, but the DH can never blow its expenditure limit’

However, you might argue the majority of that surplus is not really lost to the health service and remains in NHS bank accounts, available for future years. That’s the line taken in a recent piece by Bill Morgan, former adviser to the then health secretary Andrew Lansley.

Mr Morgan’s argument is complex, but for the sake of brevity it can be oversimplified as follows: NHS providers’ spending counts against the department’s budget (or “departmental expenditure limit”), but providers – in particular foundation trusts – have more freedom than the department to retain surpluses.

So, hypothetically, the department might underspend by £1bn against its DEL in year one, and be unable to add that underspend to its year two budget. But if the majority of that underspend is comprised of FT surpluses, those surpluses remain available for the FTs to spend when they like.

The importance of DEL

The important point, I would argue, is that individual providers might be free to spend one year’s surpluses in future years, but the department can never blow its expenditure limit – and the DEL is unlikely to rise in real terms for a long time. The question for the NHS, therefore, is what has to go unspent in future if providers are to spend their surpluses?

‘It is debatable whether the DH is powerless to prevent providers spending their surpluses’

One way the department – or, in future, the NHS Commissioning Board – can offset provider overspends is by requiring commissioners to underspend. This poses the risk, however, that commissioners will underspend by more than is necessary.

Mr Morgan writes that DH underspends are occurring because: “The department is covering off too much risk. It is, simply put, generating more underspends amongst commissioners than providers are generating overspends.”

I would add that provider surpluses are not evenly distributed. The impact of commissioner underspends, therefore, is likely to be different in areas where providers have not accumulated large surpluses.

Furthermore, it is debatable whether the DH is powerless to prevent providers spending their surpluses. If push came to shove, it’s possible the department could protect its DEL by raiding FTs’ cash balances. That was, at least, one of the options listed in an internal 2009 DH paper, uncovered during the Mid Staffordshire inquiry.

Now, you might argue that in practice the department would never do this. But that it was even considered surely underscores the importance of the DEL – and of departmental underspends – to the NHS.