FINANCE SPECIAL Contracts, payment by results, Agenda for Change and out of hours take their toll

Published: 06/01/2005, Volume II5, No. 5937 Page 14 15

A year ago, HSJ surveyed all 28 strategic health authorities and found that trusts in London and the South were facing severe financial problems.

And yet most were predicting that by March 2004 - the end of the financial year - they would reach financial balance. They did.

But it might not be quite the same this year. Of the 27 SHAs that provided figures to HSJ, almost half do not expect to break even by the end of March 2005. Overall, trusts have approximately three months to find around half a billion pounds.

And - unlike last year - the problem appears to be national.

'Most believe this year is going to be a lot tighter than the last, ' comments South Yorkshire SHA chief executive Mike Farrar.

'Traditionally the NHS goes through its worst financial time at this time of the year; after seven or eight months. It usually manages to move the position back and there will be a lot of work going on through the country to do it. But the forecast is one thing and the action to do it is another.' NHS Confederation policy director Nigel Edwards has a similar feeling: 'It is a familiar pattern in the NHS for there to be mid-year financial pressures that are often resolved before year-end. However, there are signs this year that a combination of pressures is making this balancing act harder to achieve.' All NHS organisations are required to deliver operational financial balance, and within the health economy there is a duty to collaborate in maintaining financial balance. Usually, after a lot of late nights and hard work put in by finance directors, they manage it.

But this year, targets on waiting and accident and emergency, plus the introduction of payment by results for foundation economies are causing extra pressure. And these are coming on top of some substantial costs associated with staff modernisation. The biggest obstacles to achieving balance appear to be the costs of new contracts for consultants and GPs, along with the associated costs of out-of-hours services, plus the rollout of Agenda for Change.

'The problems are to do with a number of national pay deals, ' suggests Mr Farrar. 'One would hope for something from the government in return but that may not come immediately. So we will have to absorb it for the time being.

'We are also trying to hit key targets, and that takes a lot of income. It is not unexpected, but it feels a lot tighter this year.

Mr Farrar says it is difficult to 'read' the figures compiled by SHAs because different organisations take a different approach to managing risk.

But he believes the next quarter is looking especially tough: 'The track record of the NHS is that we achieve financial balance at the end of the year, but this year it is going to be harder.

There are fewer financial flexibilities.' Mr Edwards agrees: 'Some of the techniques used to achieve financial balance in the past are no longer available - in particular, capital to revenue transfers and use of nonrecurring money. The pressures include the consultant contract, the quality and outcomes framework and a general feeling that the number of targets that need to be achieved do not necessarily match the funding available.' He adds: 'Cash is an issue that is beginning to come up the agenda.

Cash is not the same as income and expenditure; It is actual money to pay staff and there is a shortage.

Among the key issues are accumulated deficits which are starting to 'hamstring the system', says Mr Edwards. 'There is a feeling that unless they can get accumulated deficits off their backs it will be hard to go forward. It would be foolish to assume that the NHS Bank will just write them off. It doesn't want to create the impression that too many trusts have that it will pay off their deficits.' The situation is bleakest at South West London SHA. The most recent board report showed primary care trusts reporting pressures of£17.3m.

Most of this was due to a higher than forecast cost of commissioning services, although a sizeable chunk (£1.8m) is attributed to the increased costs of paying GPs under the new contracts.

Acute trusts have it even worse, with£52.9m of current deficit. Of this,£7.7m is down to the consultant contract and£1.5m to Agenda for Change. Much of the rest is 'local cost pressures' and deficits brought forward. In all,£52.4m is outstanding: almost 5 per cent of their operating income.

South West London SHA finance director Jim McAuliffe says: 'There is now a severe risk that the South West London economy will fail to maintain financial balance in 200405. Any deficits at year-end will have to be clawed back from organisations in 2005-06, in accordance with current resource accounting policy.' Mr McAuliffe explains: 'Although primary care trusts and [acute] trusts have submitted plans to manage most of these pressures, the sheer scale of expenditure this year raises doubts over how much individual organisations can cope with.

'In addition, many of the levers that the SHA had in managing financial problems non-recurrently in 2003-04 and previous years no longer exist, such as the limited ability to transfer capital to revenue. These flexibilities are being phased out as part of the preparation for payment by results, which is introduced into the acute sector in April 2005.' This year the problem is not confined to the south. Norfolk, Suffolk and Cambridgeshire SHA is currently overspending by£30m and by the end of the year is expecting this figure to have risen to£38m. Only two months ago, the authority was predicting a year-end deficit of£51m.

The organisations within the SHA had set themselves a target through the year to save£100m, but in November they had yet to identify where one-third of the savings will come from.

Finance director Paul Kemp says: 'We had a big increase last year in emergency admissions - over 9 per cent - and a lot of those costs end up with PCTs. You find that PCTs are paying for the additional activity that goes into hospitals.

'We are paying a lot more for specialist mental health patients often outside our local patch because more and more patients are being diagnosed with specialist mental health needs and local mental health providers do not have the facilities to treat them.' Other increased pressures include a rise in the costs of learning disabilities services and payments to doctors under the GP contract's quality and outcomes framework. Mr Kemp is attempting to tackle its challenges by cutting emergency admissions and providing more specialist local mental health and learning disability services.

Avon, Gloucestershire and Wiltshire SHA is forecasting a deficit of£27.1m by year-end. It hopes to reduce its overspend by making 'efficiency savings'. Of a planned total of£165m savings,£140m have been identified to date. Many difficult decisions will have to be made.

North and East Yorkshire and Northern Lincolnshire SHA has£19.1m of current 'unaddressed risk'.

Brokerage deals worth£14m are being used to bridge the gap, but£8m of this is not yet fully secured.

Further north, in County Durham and Tees Valley SHA,£19.5m of deficit is forecast at the end of the year. There are financial problems across the patch and at one trust - South Tees Hospitals - a crack team from Dorset and Somerset SHA has been brought in to help solve the crisis and overcome a predicted yearend deficit of£13m.

By the end of October it had overspent by£8.9m: 4.5 per cent of its total budget. A recruitment freeze is now in place and overspending divisions are being reviewed.

'Existing resources such as operating theatres will be used more effectively to ensure we maximise the income the trust will receive, ' claims the trust's board paper. 'The effect of brokerage as a solution would only shift the problem into a different year.' The SHA insists patient services will not be affected by efforts to manage trust deficits.

Cumbria and Lancashire SHA finance director Geoff Minns says: 'We are not expecting to break even, but will be within the controlled total that the Department of Health has given us. They are allowing us to overspend by£12.5m.' Shropshire and Staffordshire SHA finance director Phil Taylor says the increasing levels of activity carried out in order to achieve key targets is behind 'a fair chunk' of the current£12.2m deficit.

Other factors are rooted in contracts and the pressures of the European working-time directive.

But Mr Taylor hopes price reductions on drugs coming through in the early new year will ease its situation.

The SHA is one of the 14 forecasting balance by March.

The NHS has pulled the rabbit out of the hat before. But it will be a tall order for all of England's 28 SHAs to plug the£500m black hole this year.