The Department of Health has returned nearly £3bn of its funding to the Treasury over the past two years, despite facing its tightest financial settlement for five decades.

A Treasury spokesman this week confirmed to HSJ the department had handed back around £1bn of the funding it was allocated for health spending in 2011-12. Just £316m of the £1.4bn that the DH left unspent last financial year has been carried over for it to use in 2012-13.

The final sum clawed back from last year’s health allocation is double the £500m estimate that was published in chancellor George Osborne’s March Budget.

The spokesman also confirmed that the DH recorded a £1.9bn underspend in 2010-11 - but made no use in that year of the “budget exchange” scheme which allows government departments to carry over some unspent funds for use in future years.

This means at least £2.9bn of DH funding has been clawed back by the Treasury in the past two years. This is despite the NHS facing a funding settlement for 2011-12 to 2014-15 that is likely to mean its “tightest four-year period in the last 50 years”, according to think tanks the Nuffield Trust and the Institute for Fiscal Studies.

Nuffield Trust chief economist Anita Charlesworth suggested the DH needed to rethink its approach to financial risk management.

“The department’s system for managing risk essentially requires organisations through the system to plan for surpluses, leading to aggregate underspends,” she said.

“They don’t have the mechanisms in place to then reinvest that money, because they have limited access to the budget exchange scheme.”

But, knowing that the DH had limited use of the budget exchange, she asked: “Should they not manage financial risk differently, to make sure allocations intended for the NHS are invested in new models of care that will help NHS financial sustainability in the medium term?”

She suggested that some of the clawed-back funds could usefully have gone to primary and social care services. These services had been “particularly squeezed” in the current austerity drive but were central to NHS plans to make efficiency gains by shifting care out of hospitals.

Although part of the funding the DH returned to the Treasury was money previously earmarked for capital investments such as buildings or equipment, the bulk of it came from the department’s “revenue departmental expenditure limit” - its budget for the recurrent costs of providing public services, such as wages.

According to the Treasury spokesman, the DH’s 2010-11 underspend was comprised of £1.2bn in revenue funds and £700m capital funds. The 2011-12 underspend was around £866m revenue funds and £577m capital funds, he added.

A Department of Health spokesman said: “The amount spent on frontline services in 2011-12 increased by £3.4bn and we have reduced inefficient spending, saving over £1.5bn on bureaucracy and IT.

“We have rolled over £316m from 2011-12 to 2012-13 through the budget exchange - some of this has been used to fund vital projects across the NHS to benefit patients.”