NOEL PLUMRIDGE ON COLD, HARD CASH

Published: 03/11/2005 Volume 115 No. 5980 Page 17

'Our biggest concern at the moment is cash. We are experiencing real challenges in meeting our cash obligations to suppliers.' Thus Duncan Brodie, finance director of the struggling Surrey and Sussex Healthcare trust, recently warned the trust's annual meeting (news, page 6, 6 October). In simple terms, the trust is finding it hard to pay the bills. A£30.6m deficit brought forward from 2004-05, plus a further£30-£33m forecast deficit for 2005-06, means serious trouble.

And this concern about ready cash is far from unique. Even in relatively affluent corners of the NHS, finance directors are quietly concerned that 2005-06 may be the year when the NHS piggy bank finally fails to rattle when shaken.

Cash, in accounting terms, is the most liquid form of money: it was invented specifically as a means of exchange. Other 'current' assets have lesser levels of liquidity: bank balances, prepayments, people who owe us money, our investments.

With investments it is the degree of liquidity (along with riskiness) that typically determines the rate of return: we can normally get a higher interest rate if we tie our money up for longer. Then, at the opposite end of the spectrum, are 'fixed' assets: the land, buildings and equipment we own.

Sometimes only cash will do. Your house may be worth half a million, but that will not help when you are in the taxi queue at midnight and the driver wants to see the folding green. Even a credit card may not get you a ride home. Unless you happen to be royal, having no cash is a quick route to embarrassment.

The same is true of organisations.

Bankruptcies often occur in companies that are reporting healthy profits, yet at some specific point simply do not have enough ready cash to pay creditors. It happened, famously, to Rolls-Royce some years ago.

The root cause may be overoptimism about the speed at which income will reach the bank account, or it might be failure to spot a coming crisis.

Those familiar with the NHS expect forecasts of imminent financial crisis - or, at least, of infeasibly large deficits - somewhere around the time the leaves begin to fall. They are as predictable a part of the autumn scene as trick-or-treat.

The Department of Health typically derides the wilder claims, threatens organisations in deficit with a spell in the naughty corner, and counts up just how much it can find from its reserves and slippage to plug the gap.

In 2004-05, for instance, HSJ estimated in January that English trusts and primary care trusts were in deficit by about£500m (news, pages 5-7, 6 January). By early March they were suggesting£550m, and were not far out. The audited 2004-05 accounts show a total net deficit of£343m, while the audited PCT accounts add a further£266m: a final total of just over£600m.

However, as we expected (but had no means of estimating) this total deficit was partly matched by a surplus of£373m in the accounts of the 28 strategic health authorities, which presumably reflected the late release of reserves, and slippage.

Will the same happen in 200506? Early signs are that the prevalence of deep-seated deficits is continuing, and becoming more widespread. This is not altogether surprising. The single largest cost pressure across the NHS - pay inflation - remains national in its impact. Average NHS earnings have been increasing steadily, by 5.2 per cent in real terms between 1998-99 and 2003-04.

And, according to DoH estimates, the extra cost of Agenda for Change will be around£1bn by the end of this financial year. But it is still not clear what the NHS and its users are getting in return for this considerable investment.

Further large sums have gone on the new consultant contract and general medical services contract.

The average 91 per cent quality and outcomes framework score could increase the annual earnings of an average GP practice by nearly£75,000.

Meanwhile, payment by results seems to have increased the financial turbulence in the system, and the costs of finance and information departments, without any clear gain.

A recent Audit Commission review finds 'little evidence... that the new incentives [of payment by results] have generated the positive behaviours intended' and that 'expected efficiency gains have not yet been realised by the early implementers'.

Growth in hospital activity, the commission suggests, has been driven more by national targets than changes in funding.

Now there is a view, recently expressed by David Walker of The Guardian, that NHS deficits are actually not such a bad thing. They are delivering both quality and quantity.

Perhaps a net deficit of less than 0.5 per cent of the total budget is a small price to pay for the massive improvements in access. It may also be true, despite assurances to the contrary, that the DoH's back pocket is deep enough to offset most of the financial black holes - at least temporarily.

But there is a difference between calculations at national level and the short-term savings measures that, once again, are being imposed up and down the country. And, crucially, there is a difference between income and expenditure - the proper, measured, accruals accounting system we use to gauge our surpluses and deficits - and cash. Hard cash. The readies. The wherewithal to pay bills and salaries.

There is nothing quite like cash, especially when you do not have it.

With the new market system now operational in England, safety nets removed and strident talk of financial discipline everywhere, we may be about to find out the hard way what happens when NHS organisations become insolvent.

Noel Plumridge is an independent consultant and former NHS finance director.