With a significant proportion of NHS trusts in financial difficulty and many of those reporting ward closures and job losses, the financial health of the NHS emerged as one of the key political issues of 2006.

With a significant proportion of NHS trusts in financial difficulty and many of those reporting ward closures and job losses, the financial health of the NHS emerged as one of the key political issues of 2006.

In April, the Commons health select committee launched an inquiry into the causes and consequences of NHS deficits. Oral evidence sessions began in June and will culminate in mid-November with the evidence of health secretary Patricia Hewitt. The committee aims to report by the end of the year.

Its terms of reference were wide ranging, but a central goal has been to establish the extent to which deficits reflect systemic factors such as poor central management, the effect of pay awards and government policy decisions.

Of particular interest has been the relationship between trust deficits or surpluses and the resources allocated to them.

From the outset, the Department of Health has been dismissive of such a relationship. Deficits are, it claims, local problems directly attributable to poor financial management or the poor organisation of clinical services.

This stance reflects two important assumptions: first that there is no relationship between deficits and formula allocations, and second, that the funding formula is 'fair'.

Giving evidence to the committee at the end of last month, DoH director of finance and investment Richard Douglas stated that 'if you look at every deficit in the country against the formula allocation for every PCT in the country and run statistical tests... there is nothing that comes out and says there is a link with resource allocation'.

In fact, deficits can be shown to be very strongly associated with the allocation of funds. Under the terms of the current resource allocation formulas, there are huge variations in the per capita allocations received by PCTs. In 2005-06 these ranged from£830 per head in Wokingham to over£1,705 in Islington - mirroring, at least in theory, variations in the healthcare needs of the populations served by different PCTs. Yet only 13 per cent of the 60 PCTs with the highest per capita allocations ended 2005-06 in deficit, compared with 68 per cent of the 60 PCTs with the lowest.

More significant given that the whole point of resource allocation is to ensure that populations with different characteristics are funded according to their resulting healthcare needs is the fact that the likelihood that a PCT is in deficit is related to the nature of the population it serves.

Proving the link
On deprivation, the differences are stark. Only 8 per cent of the 60 most deprived PCTs ended 2005-06 in deficit compared with 65 per cent of the 60 most affluent PCTs.

The pattern is less marked outside the cities (18 per cent of the 60 most urban PCTs in deficit compared with 48 per cent of the 60 most rural PCTs), but it is the interaction between the two that is most interesting.

No less than 71 per cent of PCTs serving the most affluent and most rural populations are in deficit compared with only 6 per cent of those serving the most deprived and most urban populations. This pattern in the map, right, gives lie to the DoH's insistence that there is no link between the allocation of resources and deficits.

The outcome, as illustrated, is that PCTs across whole swaths of the country are struggling to meet the needs of their populations - particularly where those populations tend to be relatively affluent and rural. For instance, 45 of the 66 PCTs in the east of England and South Central SHAs ended 2005-06 in deficit compared with only seven of the 58 PCTs in the North East and North West SHAs.

This geographical dimension has been acknowledged by the government insofar as, according to Ms Hewitt, 'it is simply unfair that you've got parts of the country, particularly in the South, some of whom have been overspending for years, and then other parts of the country, particularly in the North, who have to under-spend, and delay the improvements they want to make, in order to compensate for the minority of organisations who are overspending.'

This assertion that trusts in deficit are overspending (as opposed to being underfunded) is founded on the assumption that the government employs, in Ms Hewitt's words, 'a fair funding formula to direct funding for the NHS towards areas of greatest need'.

The systematic patterns already described seriously undermine the assumption as they can only have emerged if the current resource allocation system is failing to address adequately the healthcare needs of particular populations.

The current weighted capitation system distributes healthcare resources according to a series of complex formulas which have been criticised on both philosophical and technical grounds.

Our particular concern is the relative importance accorded to age and 'additional needs' in the calculation of PCT funding allocations.

It has become so common to age-standardise measures of disease prevalence that it is easy to overlook the fact that, for most conditions, demography is a far more significant determinant of morbidity and mortality than deprivation.

As people get older, they are more likely to develop conditions such as heart disease and cancers and this places significant demands on healthcare resources.

Older people are also far more likely to die than younger people and, because progressive and fatal illness often requires high-intensity care, this has important cost implications.

Older but not richer
The rising costs of care for older groups are acknowledged in the current weighted capitation system. For example, the formula for hospital and community services includes an age weighting that is based on estimated expenditure per head in seven age bands.

With per capita costs ranging from£269 for a child aged five to 15 to£2,799 for those aged over 85, it is often assumed that areas with the oldest populations must receive the biggest funding allocations. In fact, the effect of the additional needs element of the model means this is very often not the case.

The indices are designed to capture healthcare needs 'over and above those accounted for by age'. Like other standardised measures that control for age, they reveal the impact of non-demographic factors on health. They are particularly responsive to the pattern of social deprivation.

And so while age is the more significant determinant of absolute morbidity, the scale of the additional needs effect outweighs that of age in the calculation of funding allocations for PCTs. The result is that younger deprived communities receive significantly higher funding relative to underlying morbidity than their older affluent counterparts.

Is this fair? In order to promote equal opportunity of access for equal needs, the distribution of funding should reflect the existing burden of disease - in absolute terms. By targeting deprived areas that suffer the worst health using standardised measures, the government is drawing upon a relative definition of need. This suggests that the concept of health equity (a reduction in health inequalities between the most and least advantaged groups) is, without open policy debate, displacing healthcare equity as the core principle of resource allocation in the NHS.

Underfunded, not overspending
It is, moreover, profoundly misplaced. While it is entirely appropriate that public health efforts should be targeted at deprived areas where standardised measures of ill health exceed the national average, the NHS as a whole (and particularly national hospital services) has little to contribute towards the reduction of health inequalities compared to other sources of variation such as income distribution, education and housing.

Directing resources towards deprived urban populations with high relative needs is an ineffective response to health inequalities, and it exacerbates healthcare inequity by underestimating the needs of less deprived, older and more rural populations.

PCTs serving such populations already face intolerable financial pressures, and many are operating with significant deficits.

But with the government insisting that all trusts now 'live within their means', the real concern is not current deficits but how future patient services will be affected in areas which we suggest are underfunded rather than overspending.

Sheena Asthana is professor of health policy at the School of Law and Social Studies, and Dr Alex Gibson is research and innovation fellow at the School of Health and Social Work, Plymouth University.