The chair of the health select committee has warned that there could be a “significant danger of perverse incentives” if the health service remains unable to carry over unspent funds from one financial year to the next.

Stephen Dorrell spoke after the committee received written evidence from the Department of Health confirming HSJ’s report that the department had returned nearly £3bn of unspent funds to the Treasury over the past two years.

He added that the committee would now want to “reflect on” whether the DH’s practice of consistently under-spending its budget remained appropriate at a time when health funding was so constrained. The committee is set to publish a report on public expenditure later this month.

“The question that the committee will want to revisit is whether this practice that has grown up of aiming for underspends continues to be appropriate in the current spending environment,” Mr Dorrell told HSJ. “No one is in favour of uncontrolled spending, but within a tight budget the [NHS] Commissioning Board ought to have the freedom to flex its agreed budget in a way that reflects best value and good quality.”

He added: “There is clearly a significant danger of perverse incentives and a risk that authorities will feel a requirement to spend up against an end of year deadline, if they feel that the money is otherwise going to be lost to the health service.

“If that were to be the result it would be a very undesirable outcome… I think that’s something that needs to be revisited, and we will look at it in the context of this report.”

In October 2012, HSJ reported that the department had returned around £2.9bn of its funding for 2010-11 and 2011-12 to the Treasury, despite facing its tightest financial settlement for five decades.

The following month, NHS chief executive Sir David Nicholson and his deputy David Flory were questioned about the story at a hearing of the health committee.

Mr Flory told the committee that although the “headline was a very powerful one of money going back to the Treasury”, a “large part of the number was underspend of capital monies associated with particular projects in the department” which hadn’t progressed at the speed anticipated.

He added that capital monies of that kind were “one-off by their very nature” and could not be used to “support on-going investment in staffing”.

However, the committee asked the department to provide a full written account of its underspend in each of the past two years, showing how much of that underspend the department had been able to carry forward for future spending.

The department’s response, seen by HSJ, confirms that it underspent by a total of £3.2bn over the two-year period. The only part of this underspend it describes as being carried over for future spending is the £316m which, as HSJ previously reported, was transferred from 2011-12 to 2012-13 under the Treasury’s budget exchange scheme.

And despite Mr Flory’s comments, the response also confirms that the majority of the underspend in each year was from the department’s revenue budget, not its capital budget.

Capital underspends made up just £700m of the department’s £1.8bn underspend in 2010-11, and just £600m of its £1.4bn underspend in 2011-12.

The response states that government departments have an “absolute requirement to manage expenditure within the financial controls set by HM Treasury”.

It adds: “For the Department of Health, this means that the net expenditure outturn of around 400 [NHS] organisations must be contained within revenue and capital expenditure limits.

“It is prudent to plan for a modest underspend to mitigate against unexpected cost pressures, whilst balancing at the same time against excessive underspends.”

It adds that given “the size and complexity of the department and the NHS” the department believes that an underspend of around 1.5 per cent is “consistent with an appropriate level of prudent financial management”.

Timeline

March 2012: Figures published in Chancellor George Osborne’s 2012 Budget reveal that an estimated £500m of the Department of Health’s underspend for 2011 will not be rolled over for its use the following year.

October 2012: A Treasury spokesman confirms to HSJ that in fact around £1bn of the DH’s 2011-12 underspend was not rolled over for future spending. He adds that £1.9bn of the DH’s allocation for 2010-11 was also returned to the Treasury.

November 2012: Health select committee asks NHS chief executive David Nicholson and his deputy David Flory to provide a written account of exactly how much was underspent, from which budgets, and how much was rolled over.

December 2012: DH provides written evidence stating it had a £1.8bn underspend in 2010-11 and a £1.4bn underspend in 2011-12. It confirms that just £316m was carried over from 2011-12 underspend for use in 2012-13.

January 2013: HSJ reports that select committee is to “revisit” question of whether aiming for health underspends remains appropriate “in the current spending environment”.