“Overview of the National Health Service in Scotland 2002/03”
Item 2 is a briefing from the Auditor General for Scotland on the report, "Overview of the National Health Service in Scotland 2002/03". I invite the Auditor General, Mr Robert Black, to address the committee.
Mr Robert Black (Auditor General for Scotland):
Thank you. I, too, take the opportunity to wish everyone a happy new year.
I welcome the chance briefly to introduce the report, which provides an overview of the main issues that arise from the 2002-03 audit of national health service boards and trusts. It also summarises how the NHS in Scotland is funded and explains how it is organised, including the organisational changes that will result from the integration of trusts with their NHS boards.
In the report, I review financial stewardship and corporate governance in the NHS and I comment on the financial performance of the health service in 2002-03. I also highlight four NHS bodies in which financial health is of most concern.
Overall financial stewardship in the health service continues to be very good. The audits were completed on time and there were no qualifications to the "true and fair" opinions that were provided by the auditors.
However, the auditors of a number of NHS bodies qualified their audit opinions on the regularity of family health service expenditure and income. That is because of continuing difficulty in obtaining sufficient evidence that family health service expenditure and income were incurred and applied in accordance with all the enactments and guidance that are in place. I have mentioned that problem in previous years.
FHS activity remains a significant source of potential fraud—I emphasise the phrase "potential fraud"—and irregularity in the health service. The Common Services Agency estimates that practitioner fraud may cost the health service in Scotland £40 million to £100 million per annum, out of the annual expenditure on the family health service of £1.6 billion. Practitioner fraud occurs when claims are submitted for services or prescriptions that have not been legitimately provided. The CSA also estimates that patient fraud cost the health service more than £12 million during 2002-03. Patient fraud occurs when patients falsely claim entitlement to free prescriptions and other services, which results in under-recovery of income by primary care trusts. The CSA is responsible for making the payments in this area. It made significant progress in 2002-03 in improving the control environment and in introducing robust payment verification checks, but it is important that further progress be achieved in order to avoid similar qualified regularity audit opinions in future.
I would like to say, however, that the report also comments on a number of good aspects of corporate governance in the health service. One example is that the new unified boards have made good progress in getting the committee structures in place—board and committee meetings are occurring regularly. There are encouraging signs that a good co-operative approach is being taken to management of each local health area.
A second example of good practice relates to the bedding down of the new performance assessment framework, which is a comprehensive performance management framework for the NHS in Scotland that was introduced in 2002. Auditors report that most health boards have found the performance assessment framework indicators to be helpful in reviewing and assessing their performance.
I will stay just for a moment on the corporate governance theme. A feature of the current structural changes is that individual health boards propose different management structures for the new integrated organisations that are coming in to replace the former boards and trusts. In my report, I point to the opportunities that may exist for health boards to learn valuable lessons from one another in successfully integrating their trusts.
I turn now to financial performance. The first thing to note is that the NHS introduced a new financial framework for 2002-03. The intention is to improve consistency in financial reporting and to provide a better picture of the overall financial performance of the health service. There will be a new operating cost statement which, in essence, will describe the net operating costs of health service bodies. Net operating costs will then be compared to the revenue resource limit, which is set by the Scottish Executive for NHS boards. In turn, a revenue resource limit is set by boards for each trust. The revenue resource limit is, in effect, the amount of resources available in a financial year to each NHS body to fund its activity.
The revised financial framework also resulted in changes to the financial targets for the NHS in Scotland. However, the statutory break-even target remains and is now interpreted as requiring NHS bodies to remain within the revenue resource limit. Twenty-three of the 28 trusts were at, or within, the new revenue resource limit targets for 2002-03, compared with 25 trusts that achieved their break-even targets in 2001-02. It is clear, however, that achievement of financial targets remains a challenge for NHS bodies.
Auditors identified three main methods that allowed the revenue resource limits to be met in 2002-03. The first of those is the rerouting of underspends within NHS systems. In the NHS in Tayside, for example, underspends within the primary care trust allowed funds to be transferred to the acute trust. That shows the benefits that co-operative working can bring to management of NHS finances. The fact that that rerouting of underspends was necessary at all, however, is indicative of the financial pressures that continue to face NHS bodies.
There is still a need to identify and address the underlying recurring deficits if financial balance is to be achieved in the foreseeable future. In the current structure of health boards and separate trusts, it is clear when budgets are reallocated between trusts—I have just given the example of Tayside—but there is a risk that, under the proposed single-tier NHS system, such transparency might be lost, and that underlying recurring deficits in particular services or directorates within a unified board may not be disclosed and tackled effectively.
Secondly, and also on the financial theme, many NHS bodies have been developing financial recovery plans, which include implementation of cash-releasing efficiency savings. It is important that NHS bodies continue to review the way in which services are provided, and to seek efficiency savings whenever that is possible. However, I have to report that the auditors of several NHS bodies have concerns about the ability of NHS bodies to deliver savings plans, which are essential if financial recovery plans are to be viable.
A third issue is that, as in previous years, it is clear that many trusts relied on non-recurring funding—totalling £266 million—to balance their books in 2002-03. Several different types of non-recurring funding can be identified, which I detail in an exhibit in the report. In some cases, in which the Scottish Executive Health Department's funding of specific initiatives is involved, health bodies can form a reasonable expectation that some funding will be received annually, although its level and exact purpose may not be known in advance. In such cases, the earmarked income for those initiatives should be matched to the specific spending needs, and is of little or no help in achieving a balanced recurring budget. In other cases, for example in disposal of surplus property, funding is available only once. Although those sources of income can be used to alleviate in-year deficits, it is important that NHS bodies do not become too dependent upon those one-off sources when they plan to achieve year-on-year financial balance.
Over the next three years, the Scottish Executive is committed to spending significantly more on the NHS in Scotland. Planned expenditure is expected to rise from £6.7 billion in 2002-03 to £8.5 billion in 2005-06. There is an expectation—understandably so—that the extra funds will contribute to improved health care, but our best guess is that much of the extra money is likely to be used to meet increased staff costs that will arise from recruitment of more consultants and nurses, from introduction of new contracts for consultants and other staff, from full implementation of the European Union working time directive, and from introduction of new general practitioner contracts.
I highlight in my report four NHS bodies whose financial health is of most concern. Those are Lothian University Hospitals NHS Trust, Grampian University Hospitals NHS Trust, NHS Argyll and Clyde and NHS Fife. My report outlines the position of each of those bodies. I will take a moment or two to give the committee a brief outline of the position, if that is agreeable to the committee.
In Lothian University Hospitals NHS Trust, the achievement of financial targets has depended significantly on non-recurring funding. The trust's financial recovery plan—dated March 2003—forecast a cumulative shortfall of nearly £180 million in the five years to 2007-08. By June 2003 the revised plan showed a balanced financial position for the current financial year. As at September 2003, however, the trust was reporting an overspend of £6.6 million against its 2003-04 budget.
Grampian University Hospitals NHS Trust recorded an overspend of £5.2 million in 2002-03, which was due to the accumulated deficit that had been brought forward from the previous year. The trust received brokerage funding from the Scottish Executive Health Department and other non-recurring—that is, one-off—financial support from Grampian NHS Board. The trust has agreed a plan to repay the brokerage funding and to recover its accumulated deficit by the end of 2005-06, but it needs to address a number of significant issues and cost pressures for that to be achieved.
During 2002-03, NHS Argyll and Clyde faced an underlying budget deficit of more than £6 million. A recovery plan was prepared, and financial performance of the Argyll and Clyde Acute Hospitals NHS Trust was seen to be a key factor in achievement of the plan. In 2002-03, the board and all three local trusts reported an overspend of £9.6 million, of which the share of Argyll and Clyde Acute Hospitals NHS Trust was £4.8 million. Without the non-recurring funding, the total deficit in the area could have been as high as £31.4 million. NHS Argyll and Clyde prepared a new financial recovery plan in July 2003, when the local trusts were formally dissolved. However, the auditor is concerned about some of the assumptions in the plan: he considers that NHS Argyll and Clyde's accumulated deficit could reach between £60 million and £70 million by 2007-08, and he suggests that it could be very difficult indeed to correct that deficit, given the pressures in the system.
Finally, during its financial planning for 2002-03, NHS Fife identified an underlying deficit of £6.9 million, spread across Fife NHS Board and both of its local trusts. All three Fife NHS bodies achieved their financial targets for 2002-03, but the trusts did so only with the use of £9.6 million of non-recurring funding. The auditors were asked to review the financial monitoring and the recovery planning process of the NHS system in Fife. They found features of good financial management, but they also found some scope for improvement. The auditor also expressed concern about NHS Fife's ability to achieve its savings plans because of pressures.
In summing up, I do not need to remind committee members that the NHS in Scotland is undergoing considerable change. It is reorganising its structure and its management arrangements at the same time as significant additional funding is being provided. Against that background, the health service faces persistent financial pressures, not least from increasing staff costs and the rising costs of health care.
Once the new unified board structures are in place, it should be an essential requirement that transparency be maintained within the NHS. In my opinion, individual health boards should allow us a clear view of the complex operational and financial activity that will continue to take place between what were formerly acute trusts and primary care trusts to support the delivery of health care in Scotland. I believe that that is important in order to support sound and open accountability and to allow a clear view of the health-care benefits that will result from the extra investment that will flow into the service.
As always, I am happy to answer any questions. My colleagues are here to help me to do that.
Members will be aware that, under agenda item 7, we can discuss how we might respond to the report, but there is ample opportunity to ask questions of the Auditor General at this juncture.
I want to ask about the Common Services Agency. The CSA caused some concern to the previous Audit Committee, which took evidence on qualification of primary care trusts' accounts in previous years. The report states that the CSA believes that between 3 per cent and 8 per cent of claims from practitioners could fall into the category of fraudulent claims. Further on, the report indicates that the regional centres wrote to patients throughout Scotland to ask for verification of treatment, but that the general practitioner sub-committee in Dumfries and Galloway did not agree to such letters' being issued. Was a reason given for that? What action can the CSA take to ensure that there is proper scrutiny of any claims that are made?
I will turn to my team to ask whether they can provide an answer to the question about the detail of the position in Dumfries and Galloway.
Graeme Greenhill (Audit Scotland):
The question is largely one of patient confidentiality. The requirement was to write to patients who were identified as having received treatment, but I think that the GPs in Dumfries and Galloway felt that that was a step too far in terms of patient confidentiality.
That leads to another question about why we cannot be assured that proper claims are being made. There are GPs throughout each of the health board areas, yet because the GPs in one area refuse, we cannot check there although we check everywhere else. Patient confidentiality should be the same in Dumfries as it is in Dundee or Dingwall. How do we overcome that?
We would not wish to mislead the committee, so the committee may have to take up that issue with the Health Department. We also have to reflect on the possibility that the world will have moved on since the timing of the report, which mentions an issue that was of current concern at the point when we were completing the audit.
One issue that is highlighted in the report is that, by amalgamating the trusts into single-tier boards, we might lose transparency about where deficits or losses occur. Can you give us more detail about what needs to happen to address that problem? I understand that Argyll and Clyde NHS Board is talking about abolishing the three trusts and setting up three new divisions. With one hand the trusts are made to disappear, but with the other hand they are brought back. Can you indicate how other areas of Scotland will manage those bigger units?
I will be pleased to do that; I believe that that is an extremely important issue.
The report identifies some of the in-year developments that take place in order to allow the health system at board level to report financial balance. A recurrent experience is that pressure within financial years tends to come on acute trusts. That seems to be a feature in all parts of Scotland. There must be a possibility, therefore, that in-year pressures on acute trusts will continue in future years. Budgets will have to be reallocated from primary care and community care activity in order to bring the whole system into balance. The Health Department will have dictated its strategic priorities for the health service as a whole and, in turn, health boards will have set budgets to accord with their own priorities. It strikes me that there is a possibility that a recurring feature will be that the money is not actually spent where it was intended to be spent. I imagine that that would be of continuing concern to the committee. That is one possible risk that exists.
Another risk that exists is that the provider units will not have clear incentives to manage their budgets well. If I were managing an acute directorate budget and got into the habit of depending on funding's being transferred from other parts of the NHS system each year, perhaps I would have a less clear incentive to manage within the budget than if there were transparent financial reporting on my budget.
My final point relates to the role of the committee: if the financial reporting deals with, say, only the overall financial performance of an NHS board, where the bottom line is that the board has achieved financial balance, that means that the committee could comment only at a very high level on what is happening within the health service. The committee would not therefore have been in a position to scrutinise terribly effectively what was happening to, for example, the £748 million of public funds that Lothian NHS Board that were spent in the financial year in question.
For all those reasons, it is important that we encourage the Scottish Executive Health Department to expect health boards to report in a transparent and consistent way the moneys that are spent on the acute sector, on primary care and on joint resourcing.
You said that it is always the acute sector that seems to lose control of the budget during the year. What are the underlying reasons for that? Is it because of poor planning or just because of unexpected and unforeseen increases in demand?
It is fair to acknowledge that the challenges of managing the budgets in the acute sector are particularly intense. Committee members will be well aware of what those are, but let us just remind ourselves. The new deal for junior doctors and the national pay awards are flowing through the system and we have the introduction of the European working time directive. We have significant increases in employers' superannuation and national insurance contributions and we have the cost pressures from drugs, which affect acute care and primary care.
Given the nature of the business of an acute hospital—very capital intensive and intensive in the use of highly professional manpower—there are clearly severe pressures on those budgets. There might, in order to try to balance the system, be greater scope in-year to turn the tap off for some of the activity that takes place in community care and joint future funding. It is possibly marginally less challenging in the primary care and community care sectors to turn the taps off during the course of a financial year.
That perhaps indicates some of the systemic reasons why it is important that the committee be able to understand what is happening within health boards as well as at overall health board level.
Paragraph 3.31 of the report states:
"SEHD does not know the cost of implementation of New Deal".
That is a staggering statement in an Auditor General's report. Given your explanation of the cost pressures in the system, surely the Scottish Executive Health Department must have a handle on the cost to the system in the next two or three years of the new deal, the new contract for GPs, new consultants' contracts and the European Union working time directive. If not, how on earth does it construct budgets and work out whether all the extra money that we are delivering into systems will deliver one extra better example of health care? That seems to be the fundamental question.
It goes without saying that the department is best placed to answer that challenge. However, I invite Caroline Gardner to give a sense of our understanding of what is happening in this area.
Caroline Gardner (Audit Scotland):
Both the new deal and the new general medical services contract are United Kingdom-wide agreements that are being implemented in Scotland. I know that the Health Department is doing a great deal of work to enable it to understand what the implications may be, both nationally and at health board level. The department is reaching the point of having ranges of estimates for each element, depending on the circumstances in which those elements are implemented. However, it does not have a clear figure for the cost of implementation. The committee may want to take up that issue when it considers how it would like to progress the report.
That raises the question of how we meet ministerial targets.
Yes. We must accept that budgeting in the health service is complex. To a great extent, the service is demand led and responds to emergency or urgent pressures. For that reason, health service budgeting is not an exact science. That is no defence for not doing the best that we can to produce sound estimates. However, there will always be an element of financial management in the health service. That highlights the importance of the transparency to which the Auditor General referred when he introduced the report. We must start with the best estimates that we can produce and examine what changes in practice as the service develops and is delivered throughout the year.
I give notice that, if time permits, I would like to ask a couple of questions specifically about Lothian NHS Board. For now, I will restrict my questions to a few of the bigger national issues on which the Auditor General touched. I suspect that I should protect myself by noting that those issues relate to measures that I was responsible for introducing during my time as Minister for Health and Community Care. However, I do not think that that presents me with a conflict of roles when asking about subsequent developments.
My first question relates to the performance assessment framework. I am pleased to hear that its role in assessing the performance of the NHS, both locally and nationally, is bearing fruit. However, I am aware of concerns—which I had at an early stage and have heard voiced more recently—that there is at least a danger that everything and awthing will be added into the performance assessment framework, which will consequently lose focus.
There is also concern that, by its nature, any performance assessment system can place undue emphasis on quantitative measures, rather than some of the wider qualitative measures that are important for the strategic objectives of the health service—not least some of the wider health improvement aims that the Executive has set. Can you comment on the development of the PAF? What are your observations on the specific concerns that I have raised?
We are working on a report that considers the performance management and reporting systems in the health service, which will be published before too long. When the report appears, there will be further objective information that will allow us to answer your questions and to address your concerns more fully. I suggest that we take up the matter when that report, which will be complementary to the report that we are discussing today, is published in the spring. We are acutely conscious of the need to reflect adequately the performance targets that are more difficult to measure. That is a challenge for the health service.
I am grateful for that answer.
The second issue about which I want to ask is the on-going process of integration of decision making. Again, I am pleased to hear and read your observations that the move towards integration and the establishment of unified boards have led to greater co-operation within the system. What evidence is there that the process is delivering greater efficiencies and, in some cases, economies of scale, through the integration of common functions such as finance and human resources? The duplication of many of those functions under the internal market was one of the main concerns that drove the process of integration. Are we seeing changes on the ground? Is the sharing of functions allowing the release of resources that can be directed at other aspects of health service delivery?
The short answer to that question is that it is too early to provide evidence that the new arrangements are achieving benefits. The process of integration is under way at the moment. As I am sure members of the committee are aware, the department is placing considerable emphasis on the sharing of back-office functions. Our on-going conversations with senior people in the health service suggest that progress so far in that area is encouraging. I look forward to being able in a year or so to report objective audit evidence of the benefits that are being delivered.
Another issue on which I touched in my opening remarks was the emerging evidence of diversity and difference in how the 15 health boards organise their affairs. I made the observation that it would be good if the NHS learned lessons from the different practices and arrangements that are developing in different parts of Scotland. I hope and intend that the audit process will monitor the efficiency gains that are achieved, so that the NHS as a whole can learn lessons from the different experiences that are beginning to emerge. However, it is very early days.
I want to pursue the subject of integration and to pick up George Lyon's line of questioning about transparency and your concerns that there is a risk that there will be a reduction in transparency as trusts are dissolved and the process of unification continues. Can you comment further on that issue? It strikes me that your comments could be interpreted as suggesting that a system based on completely separate entities is necessary in order to have transparency. I know that you were not suggesting that, but is it not the case that there are many examples of public and private sector organisations that operate in a corporate fashion but nonetheless have systems that generate a high degree of transparency and accountability at different managerial levels? As the NHS in Scotland moves forward into the next phase of its development, how can it ensure that it adopts the best practices in that regard?
At this early stage, the only comment that I can offer is to encourage the department and health boards to ensure that they report in a transparent way, so that the public, the Scottish Parliament and the committee are aware of how these very large sums of money are being used. Integration does not mean that hospitals disappear—they will still be huge cost centres. We need to be aware of how budgets are being managed within those cost centres.
My final question relates to the working time directive. I ask you to share with us your overview of the wider impact of the working time directive on the public sector in Scotland, as you are probably uniquely placed to do that. We hear a great deal about the impact of the working time directive on the NHS, but I have also heard comments from the police service, for example, about the way in which the working time directive is being implemented in the UK and the impact that that is having on public service delivery and costs. To help us to benchmark a little, can you say whether problems and costs that are being encountered by the health service are replicated in other parts of the public sector and the extent to which such problems and costs are unique to the NHS?
I am sorry, but I doubt whether we have such information at hand. Perhaps one of my colleagues feels sufficiently in tune with what is happening in other parts of the public sector to comment.
Bearing in mind Bob Black's caveat, I will hazard a comment, which will be no more than that.
We have kept an eye on the working time directive and it is obvious that its impact will be much greater on organisations such as the health service that provide a 24-hour service and are demand led. In such services, one cannot stop at 5 o'clock, say that that is the end of the working day and go home. The indications are that the health service is by far the most significantly affected service, but services that have some of the same characteristics as the health service, such as the police, will be similarly affected. The directive will become more of an issue for the justice system and courts—for example, youth courts and drugs courts—that are open outwith the normal working day for good reasons; they might be open either all the time or on particular occasions.
Managers will have to start to take more account of the impact of the working time directive on their ability to provide extended services and the costs of doing so. We bear such things in mind as we look ahead to the future work that we will carry out for the Auditor General and the Accounts Commission. I hope that what I have said gives the committee an indication of the type of services that are affected.
That is helpful.
I want to check that I understand the terminology correctly. Paragraph 29 of the report mentions "cash releasing efficiency plans". I presume that that means efficiency plans that allow people to spend the money that has been saved and vire it to another department.
The phrase means initiatives that have been identified that will allow money to be released for redeployment to other activities or to help with a deficit without damaging the level of service that is currently being delivered.
If members have no further questions, Susan Deacon may ask about Lothian.
Auditor General, you said earlier that significant cost pressures still have to be addressed in Lothian. Will you elaborate on that? I have read the section of the report that deals with the matter and declare an interest as a Lothian MSP.
There are many claims and counter-claims in Lothian—I am sure that similar claims are made in other parts of the country—as to whether the problem relates to management practices or to disproportionate cost pressures as a result of the area's particular characteristics. I suppose that a specific difference in Lothian is the new Edinburgh royal infirmary. Can you comment further on the matter, beyond what you have already said?
As you say, we have outlined the situation in Lothian in some detail. We are talking about a hugely complex and very large-scale operation, so it might be worth my commenting only on the issue of private finance initiatives, which is a recurrent concern and appears in the media from time to time.
Lothian University Hospitals NHS Trust makes payments of around £28 million a year to the PFI contractor for Edinburgh royal infirmary. The financial pressures largely result from double-running costs in running out the old service while the new service is building up. The health board provided almost £17 million of non-recurrent funding in 2002-03 to help to meet such pressures. In other words, the short-term pressures are double-running costs.
As a result of the audit, we do not have any real evidence that the PFI deal of itself is a major contributor to the financial pressures that are being faced, but given that there is a commitment to PFI payments for 25 years or so, once those PFI costs are taken out, the pool of expenditure to achieve efficiency gains and redeploy resources is smaller, which simply adds to the pressures. However, one would expect a trust and indeed a unified health board to spend such sums in securing acute care, whether through a PFI deal or conventional financing and service delivery.
I have a couple of questions on NHS Argyll and Clyde that directly affect my constituency. In paragraph 4.18 of your report, you speculate that NHS Argyll and Clyde's cumulative deficit could reach £60 million to £70 million by 2007-08, which is around 10 per cent of its annual funding. The report goes on to say that NHS Argyll and Clyde's financial recovery plan
"would be daunting for any NHS system".
It also states:
"NHS Argyll and Clyde has a history of not meeting savings targets".
Will you elaborate on that? What are you concerned about in respect of NHS Argyll and Clyde's ability to adhere to the agreed recovery plan?
I turn to Caroline Gardner for help to answer that question.
The issue in Argyll and Clyde relates to the fact that the board has had significant financial and other problems in the past. A lot of action has been taken to deal with those problems. The report is based on the auditor's comments. The auditor, who has had detailed involvement with the board's managers in considering the action plan, has reached the view that the targets are very challenging and will be hard to achieve, that progress during the first half of this financial year shows difficulties and that the board has a record of finding it hard in practice to achieve the savings that it has identified as part of the plans that have been required to allow things to come into balance in future. The auditor reached the view that there is still a reliance on non-recurring funding to make up the plan for future years. The assessment is based on the judgment that the situation is difficult to bring back into balance; it is also based on the board's history of finding it difficult to take action for all the reasons that we understand, relating to the need to respond to demands for health care while continually—not just on a one-off basis—trying to rein back spending.
Perhaps it is worth emphasising that the £60 million to £70 million estimate is the worst-case scenario that the auditor identified if expenditure pressures continue to lead to increases in year-end spending and if the non-recurring income that the board has enjoyed dries up. I suppose that the auditor is saying that it might be very difficult—if not impossible—to recover the position, because the board has had a history of finding it difficult to achieve savings targets as a result of pressures. Efficiency savings on such a scale would be difficult to achieve in any board area, given the pressures in the NHS system.
I have a small question. Is it possible or reasonable to compare the current overall administrative costs with the service's overall administrative costs 30 years ago, for example?
I regret that the short answer is no. The health service has changed out of all recognition over that period.
I bring the discussion to a close. The committee can discuss later how to progress the issue. I thank the Auditor General and his team, including Caroline Gardner and Graeme Greenhill, for helping with members' questions.