The dire state of public finances means the NHS will be permitted to spend less than half the surplus it has generated over the last two years.

At the same time, a radical shake-up of the way resources are allocated to primary care trusts will see funds shifted away from inner city deprived communities towards rural areas with elderly populations.

The NHS operating framework for 2009-10 confirms the DH will ask the NHS to cap spending on the£1.8bn surplus to just£800m over the next two financial years. That will leave the Department of Health going into negotiations with the Treasury over the NHS’s allocation for the tight period 2011-12 to 2013-14 with a£1bn surplus, which experts said it would be impossible to ignore.

Asked if the£1bn was effectively lost, NHS chief executive David Nicholson told HSJ: “All we can say is what our own secretary of state has said, which is that the surpluses stay where the surpluses are, and that’s our assumption going into the next comprehensive spending review.”

He said the DH’s position in negotiations with the Treasury was that any funding growth would be “on top” of the surplus and that he had no reason to believe the Treasury would disagree.

But NHS Confederation policy director Nigel Edwards warned: “You don’t go into discussions with the Treasury saying ‘this is our£1bn to keep’. All money is fungible with the Treasury. The idea it won’t be taken into account is not realistic if you put yourself in [its] shoes.”

Surplus drawdown

DH director general of NHS finance, performance and operations David Flory said the “surplus drawdown” plan was a good balance between the need for the service to “keep as much in our pockets going into harder times as we can” and the need to be fair to those organisations that had generated surpluses.

On average PCTs will receive an increase of 5.5 per cent in 2009-10 and 2010-11, compared with 6.4 per cent awarded to the DH as a whole.

A long-awaited change to the way population needs are measured has radically changed the funding target for many. Some PCTs covering the most deprived populations that were deemed the most “underfunded” under the old formula, such as Heart of Birmingham and City and Hackney teaching PCTs, are now described as substantially “overfunded”.

The change follows concern that PCTs serving rural areas with a higher proportion of older people were penalised under the old allocation formula.

Although the new targets leave some PCTs as much as 23 per cent “overfunded”, all will receive funding increases of between 5.1 and 8.6 per cent over the next two years.

Vulnerable

But the new formula will leave those designated “overfunded” feeling vulnerable from 2011-12 onwards when NHS growth is expected to be 1 per cent or less in real terms.

PCT Network director David Stout said: “Either the NHS will have to abandon moving [PCTs] to their target or we will have to have a policy where we take money away from those over target.”

But hospital trusts will feel the pinch first. The baseline increase on the hospital tariff will be just 1.7 per cent in 2009-10 and 1.2 per cent in 2010-11. Hospitals will be able to earn another 0.5 per cent by meeting the requirements set out in the commissioning for quality and innovation framework in the first of those years and possibly more in 2010-1.

That means hospitals face tariff inflation below the minimum 2.4 per cent increase in next year’s pay bill.

Mr Edwards said: “There will be lots of sharp intakes of breath over that. It will be very challenging.”