“Overview of the financial performance of the NHS in Scotland 2005/06”
Item 2 is a briefing from the Auditor General on his report "Overview of the financial performance of the NHS in Scotland 2005/06".
Mr Robert Black (Auditor General for Scotland):
Good morning. My report "Overview of the financial performance of the NHS in Scotland 2005/06" was published on 14 December 2006. This year's overview report on the national health service focuses on financial performance and is based mainly on the audited accounts and auditors' reports for 2005-06.
As the committee knows very well, Scotland is spending more each year on the health service. The Scottish Parliament voted £7.5 billion for the NHS in Scotland in 2005-06, and the NHS also received £1.5 billion from national insurance contributions, so total funding was around £9 billion. Funding for the health service is planned to reach £10 billion by 2007-08. As members know, Scotland spends more on health care per head of population compared with other United Kingdom countries. Despite those increases in funding, the service will continue to face a number of financial challenges in the coming years, including, among others, pay modernisation initiatives, the impact of service redesign, the new national tariff and rising energy prices.
As a whole, the NHS incurred a small overspend of £176,000 against its revenue budget and a £70.8 million underspend against its overall capital budget. That resulted in a total underspend of £70.6 million against the overall health budget. That underspend compares with an overall overspend of £32 million in the previous year.
The 24 NHS bodies reported an overall underspend of £69.6 million against their revenue resource limit for 2005-06. That compares with an overall underspend of £4.6 million in 2004-05 and appears to represent a significant improvement in the financial position of the NHS in Scotland. However, it includes the write-off of NHS Argyll and Clyde's cumulative deficit of £81.7 million during 2005-06. Excluding the NHS Argyll and Clyde situation, the increase in the total cumulative underspend from 2004-05 to 2005-06 was £4.9 million for the remaining 23 NHS bodies.
To understand the underlying financial pressures, it is important to look behind those year-end figures. Twelve NHS bodies had spending plans that exceeded the current funding that they had available in the year. Ten NHS boards had funding gaps totalling £147 million—five boards accounted for £131 million of that total—and two special NHS boards also had funding gaps, although none had funding gaps in the previous year.
My previous overview reports have commented on the fact that NHS bodies have relied on non-recurring funding to achieve their financial targets or to support their financial position. That continues to be the case. I want to mention issues that arise in a few boards in particular, but the use of non-recurring funding is an important issue. Although we must recognise that the use of non-recurring funding is a normal part of running the NHS in Scotland, such funding should not be used to excess or for sustaining day-to-day activities in the longer term. Eighty per cent of the measures used by the boards that I mentioned related to non-recurring funding, so boards are still relying significantly on such funding to plug the gaps.
Two health boards—Lanarkshire NHS Board and Western Isles NHS Board—failed to achieve one of their financial targets and reported a combined cumulative deficit of £10.9 million. The corporate governance arrangements at Western Isles NHS Board featured as an issue in my previous overview report, but the auditor has reported some improvements on the issue in 2005-06 and the board's internal auditors have made a number of recommendations, which the board is currently addressing.
The auditors for NHS Highland qualified their report on the 2005-06 accounts due to a difference of view concerning the board's accounting treatment of two private finance initiative contracts. As the committee is aware, I have already presented to the committee section 22 reports on Argyll and Clyde NHS Board, Highland NHS Board, Lanarkshire NHS Board and Western Isles NHS Board.
I want to highlight to the committee the position that auditors reported on NHS Lothian. I have commented on the financial performance of NHS Lothian and the former Lothian University Hospitals NHS Trust in each overview report since 2001-02. NHS Lothian relied on non-recurring measures totalling £32 million plus savings totalling a further £24.3 million to report its surplus of £179,000 in 2005-06. NHS Lothian's five-year financial plan forecasts that the board will break even in 2006-07. However, the financial position shown in papers submitted to Lothian NHS Board in recent months suggests that the board might overspend its budget for 2006-07. That was certainly the situation in September, when the figures were finalised for my overview report.
A further point is that the auditor's work on systems and controls at NHS Lothian found important areas where basic financial internal controls were, in the auditor's view, absent or not operating as well as they should.
I also want to mention, in the context of the NHS, the efficient government initiative, about which I will brief the committee later. The NHS in Scotland is expected to make a contribution of £523 million in savings and efficiency gains by 2007-08. Cash-releasing savings have been reported across the NHS, but few time-releasing savings have been reported. The NHS had aimed to achieve time-releasing savings of some £22 million in 2005-06 but no savings were reported for that year. Members can find more information on how the efficient government initiative applies to the NHS on pages 20 and 21 of the overview report, which provide further details. I recommend that part of the report to members.
A further factor adding to pressure is the move to single-system working. The move presents boards with an opportunity to improve financial management and to harmonise budget setting and controls. My report comments on improved financial management arrangements but also highlights several boards where further work is required. Most NHS bodies are making progress on setting up structures and governance arrangements to support single-system working, but the transition is proving particularly challenging for some of the larger boards. Community health partnerships are anticipated to play a key role in reshaping health services in Scotland and in helping to promote partnership working. I am pleased to note that most CHPs were operational by April 2006, although my report recognises that governance arrangements are at an early stage of development.
In conclusion, the NHS in Scotland had a significant overall underspend in 2005-06, pretty well all of which was due to an underspend on capital. Many NHS bodies continued to rely quite significantly on non-recurring measures during 2005-06 to support their financial position. However, from 2006-07, the opportunity to make capital-to-revenue transfers will be removed. As a result, the challenge of remaining in financial balance will be all the greater for NHS bodies. In addition, health boards are expected to continue to deliver savings in line with the targets that have been set under the efficient government initiative. Therefore, it will be all the more important that boards ensure that they have in place strong financial planning and financial management arrangements.
Convener, my colleagues and I are, as ever, happy to try to answer any questions that committee members might have.
Thank you very much. Clearly, there are a number of underlying issues in the report in which members might be interested. I have several questions that I want to ask, but I invite questions from other members first.
I have a question on the issues of efficient government and productivity that are mentioned in the financial overview report. As part of the process of auditing the management of health boards and the efficient government initiative, are Audit Scotland and the Auditor General in effect involved in encouraging, directing and supporting boards in their efforts to identify opportunities for making recurring productivity improvements in the delivery of health care services? If so, are all boards engaging in that process and responding to that challenge, or is performance throughout the country patchy?
I expect auditors to support continuous improvement by bringing to the attention of public bodies areas in which other organisations are using best practice and there is audit evidence that supports the recommendation of that best practice to other bodies. That is a general role of auditors.
As the committee knows, the efficient government programme is a comparatively recent initiative. It was launched in 2004, so it is early days for it. The only work that we have undertaken to date on efficient government in the NHS and elsewhere has been on the systems and processes for capturing the information that is necessary to report savings. I will give a progress report on the efficient government programme later in the meeting. That said, I expect auditors to endeavour to monitor health board initiatives that have been particularly successful and to recommend successful initiatives to other boards. We will include in future overview reports examples of good practice in the health service, as we have included such examples in past reports.
I emphasise that the Scottish Executive is putting in place a lot of support for public bodies through the efficient government delivery division, the e-procurement initiative and the national procurement initiative generally. That support includes support to the health service to promote best practice in the drive for efficient government. The auditors have a complementary role in supporting what is happening in the Executive.
I, too, want to ask about the efficient government initiative. In particular, will the Auditor General say a little more about time-releasing savings? I understand that an important distinction must be drawn between potential cash-releasing savings and time-releasing savings. Cash-releasing savings have been the subject of efficiency measures in the NHS since God was a boy, but time-releasing savings are particularly interesting. Will you say more about progress on time-releasing savings?
I am also interested in time-releasing savings. The report states that the NHS aimed to achieve savings of £22 million from time-releasing activities in 2005-06, but that no savings were reported in that year. In 2006-07, the NHS aimed to achieve savings of £46 million. The figures suggest that it will have to find £68 million to £69 million in the next year to reach the position that it should be in. How can it double its efforts in 2006-07?
I will make two points. First, as you said, the NHS has had no significant success to date in delivering time-releasing savings. It aimed to achieve time-releasing savings of £22 million in 2005-06, £46.5 million in 2006-07 and £73.9 million in 2007-08, as a result of better consultant productivity—the committee has, of course, extensively considered that topic in the past. My report on the consultant contract highlighted the difficulties of achieving such savings, as many consultants work for more than their contracted hours. It is important for us not to have inappropriate expectations about what might happen in future years. A significant challenge is involved in achieving those time-releasing savings.
Secondly, the terms and conditions of service for many NHS staff are strictly preserved for perfectly sound reasons to do with the welfare of those staff, but that can sometimes make it more challenging for boards to find new ways of delivering services with the same resources. Delivering time-releasing savings in order to improve productivity and impacts is quite a challenge in the NHS.
I want to pursue that a little further. I recognise the challenges that exist and do not want to get into the distinctions that auditors draw in such matters, which I am sure are important. However, in layperson's terms, it strikes me that time-releasing efficiency savings have the most potential not only for reducing spend, but—crucially—for improving practices, performance and productivity. An enormous debate has gone on for decades, which will doubtless continue, about whether cash-releasing efficiency savings in the public sector deliver efficiency improvements or whether they are more to do with reducing spend in particular areas. However, it is of particular concern that there has been least improvement in time-releasing efficiency gains, which we hoped would result in sustained and sustainable performance and productivity improvements. I am interested in what you have to say about that matter in general and about what the NHS might be expected to do in the future to bring about significant improvements in time-releasing savings, which are important.
I remind members that not cutting public spending is a fundamental principle of the efficient government programme and that the programme is not about only savings. I understand that the policy is that any cash that is released as a result of more efficient working is ploughed back into the service.
The report states that significant cash-releasing savings have been made, which have been redeployed in the service. The report mentions, for example,
"£38 million of savings from national arrangements for the pricing of drugs"
and states that
"The target for the year was £42 million",
which was quite ambitious. The savings of £38 million are available for reinvestment in the health service. I understand Susan Deacon's point about the importance of time-releasing savings in driving innovation and better practice, but I encourage members to bear it in mind that significant savings have been made in other areas, not least as a result of the national arrangements for the pricing of drugs and improved drug prescribing—savings of £21.6 million have been identified as a result of improved drug prescribing.
Paragraph 100 of the report, on page 25, states that
"NHS boards are devolving key areas of responsibility to their CHPs",
and paragraph 99 notes that
"Governance arrangements in CHPs are still developing".
Are boards also developing a new set of baselines against which to monitor the performance of community health partnerships?
As we say in the report:
"Governance arrangements for the new CHPs are at an early stage."
The report includes a map that shows the 10 areas of Glasgow—the agenda is big and complex. Because responsibility for delivering services is being devolved, it will be more important to have information systems that allow the centre to capture what is happening at the devolved level and the extent to which the CHPs can make a contribution to the efficient government agenda, for example. That is a challenge.
Perhaps my colleagues from Audit Scotland can say a little more about what is happening.
Angela Canning (Audit Scotland):
Through the boards, the Executive is working with CHPs to develop joint improvement targets for them. Obviously, that work will cover what is going on in the health service as well as how the health service is working with local authority partners to deliver better services for people at the local level. The Executive is progressing that work.
I want to ask about the impact of national contracts on achieving savings. The big issue is the impact of those contracts on small to medium-sized businesses in local areas. Has any work been done on whether small businesses have ceased trading because of national contracts? The report does not cover that issue, but we should look at matters more widely, get outside the silo and consider the impact that there has been.
As you say, the analysis that we undertook for the report did not cover that issue, and my colleagues do not appear to have any general knowledge about it. I am sorry. We have not considered the issue.
Forgive me, but I also want to ask about NHS Ayrshire and Arran. That board's ability to achieve its spending forecasts has been challenged. I represent the area in question and am concerned that the board will not meet its forecasts. Has there been a further update on the situation? The report states:
"At the beginning of 2005/06 the board planned to reduce its cumulative surplus of £22.9 million to £9.3 million by the end of 2005/06."
The board has received an extra £13 million since then. Is any further information available on whether it is on track to spend that money? Will it again bank the money?
Barbara Hurst (Audit Scotland):
We do not have any up-to-date information on that. We had a similar discussion about NHS Ayrshire and Arran last year and we asked what the money was not being spent on. The money that it had at the end of 2005-06 had been held over for some key clinical priorities. It was simply slippage of planned expenditure into the next year.
Surely the board should have a better handle on the matter. The issue has again been identified, so the Health Department should assist the board to ensure that the slippage is reduced as much as possible. Is it doing so?
We agree that carrying forward such relatively big surpluses is not good. Doing so is better than carrying forward a deficit, but the board's financial management is still an issue.
Essentially, the Executive and the board should address the matter together, as Margaret Jamieson said.
I want to return to consultant productivity and to what Susan Deacon asked about. Demands on the health service will certainly increase as a result of the demographic issues that we face. Is the non-achievement of time-releasing savings and therefore productivity improvements a particularly alarming signal of where the health service is heading? Will it be unable to cope with the inevitable demands that will be placed on it in the years to come as a result of increases in people's life expectancy, for example? We are entering a spending cycle in which the kind of increases in resources that there have been in the past few years will not be forthcoming. Notwithstanding the achievements that there have been with drug budgets and so on, is not that the key issue relating to the health service's performance that must be tackled?
A full answer to that question would include consideration of the speed with which service redesign will be fully implemented. The need to deliver health services more appropriately in the future in community settings and to free up resources at the acute end of the sector in order to address needs that are best addressed in acute hospitals underpins service redesign. An issue that underpinned the consultant contract was that of freeing up consultants' time and providing the right environment for them to work more innovatively and flexibly as part of a whole system of health care.
I wonder whether the team has any other information that will help to answer Mr Swinney's question.
We produced a detailed report on the consultant contract earlier this year. In the process of doing so, we thought that it would be difficult to demonstrate savings without there being a very robust way of measuring them. We understand that the Executive is now working with colleagues across the UK to develop a measure for consultant productivity. However, as the Auditor General said, that will rely on there being good ways of assessing how services are being delivered differently, and I do not think that the health service can demonstrate that at the moment.
I want to ask about single-system working, which is something that we have not touched on in our questions, although it was mentioned in the Auditor General's opening remarks. The report states:
"Most NHS boards are making progress in setting up structures and governance arrangements to support single system working but the transition has been more challenging for some of the larger NHS boards."
I would like the Auditor General to elaborate on that.
Some five years have passed since unified boards were first put in place, and around three years since legislation was finally enacted to remove NHS trusts in Scotland. There was a clear expectation that that would bring about general improvements in ways of working and in making the system pull together, but there was also an expectation that there would be a move towards the sharing of functions and the removal of duplication in human resources, finance and payroll functions across all the different entities within a board area. Some streamlining of management across board areas, moving away from the multiplicity of chief executives and the like, was also expected. Can you give us some assurance that real and meaningful progress in those areas has been achieved?
It is an area of considerable concern to all of us, and it is for that reason that the auditors will be monitoring the situation quite carefully this year and next year. I anticipate that that theme will feature quite significantly in the next overview of the health service, which will look at both performance and financial management.
The challenge in the larger boards is intrinsically one of size and complexity, but it is also related to the fact that single-system working is taking place at the same time as the move to community health partnerships and community health and care partnerships. That creates quite a complex and challenging range of issues for the board at the centre to manage and shape. Members of the team may be able to give the committee more insight into the position in the boards.
In paragraph 83, we mention the shared services project, although fewer savings are now anticipated from that, purely because quite a lot of activity has happened around single-system working. We have highlighted a case study from Lothian, and it is clear that some boards still have different financial systems across their functions, and that they really need to move to a single system. Not only is that approach more efficient, but it reduces any risk of mistakes happening in the accounts. In general, savings are being made across the boards, but some boards have specific problems with integrating their systems.
I thank the Auditor General for his briefing.
I remind members that we will consider later in the meeting how the committee wants to react to the briefing and the report.