“Overview of the financial performance of the NHS in Scotland 2003/04”
Under item 2, the Auditor General will report to us on the "Overview of the financial performance of the NHS in Scotland 2003/04", which was published yesterday.
Mr Robert Black (Auditor General for Scotland):
This document is the overview of the financial performance of the national health service in Scotland for the financial year 2003-04. It complements my performance overview report, which came out in August. In this financial overview, I comment on the overall financial performance of the NHS in Scotland during 2003-04. As in previous years, I have identified the factors that seem likely to affect future performance.
Most NHS bodies achieved their financial targets in that year. However, four boards finished the year in deficit: Argyll and Clyde, Lanarkshire, Grampian, and Western Isles. Although Argyll and Clyde and Lanarkshire have large deficits, the overall deficit for the NHS in Scotland is small in comparison with the amount of money that is spent.
The in-year projections of three boards for this year are anticipating deficits in 2004-05. Those boards are Argyll and Clyde, Grampian, and Greater Glasgow. In addition, some boards have identified funding gaps for 2004-05. Although the boards in question have financial recovery plans in place, some of the plans include savings targets that are quite challenging. On pages 22 and 23 of my report, you will find exhibits outlining the savings plans in place for Argyll and Clyde, Lothian and Greater Glasgow.
In the report, I have summarised the factors that might affect future financial performance. I draw three main sets of factors to the committee's attention. The first relates to the financial strategies that are being used by some NHS bodies to achieve financial balance. Because about 80 per cent of boards' budgets are committed to staffing, property and family health services, boards find it difficult to free up resources to redesign services or meet budget constraints. As a result, some boards are continuing to rely on non-recurring funding to a significant degree. The problem with using one-off resources such as those is that they do not address the underlying cost pressures. Boards have generally found it difficult to find genuine year-on-year savings that would reduce costs and free up resources for service improvements.
The use of non-recurring funding for the past year is summarised in exhibit 6 on page 19 of the report. We estimated that it amounted to more than £370 million. The largest single item—some £218 million—came from ring-fenced money. Although that is money that is designed for specific purposes, it is being spent in order to enable the boards to achieve balance. In some boards, the amounts involved can be significant. For example, Lothian relied on one-off funding of more than £44 million in 2003-04 and it is likely that it will need nearly £40 million from one-off resources in 2004-05.
The second set of factors relates to a number of cost pressures that the NHS is facing, including pay modernisation. Of course, that is a matter that the committee has considered in the past and was described in a performance report that you saw earlier in the year. I have provided updated figures from the Scottish Executive Health Department for the various agreements, which are estimated to total between £234 million and £364 million for 2004-05. Details of that can be found in exhibit 7 on page 24.
We asked individual NHS bodies to provide their local estimates for each of the pay modernisation agreements, as that would give us the local perspective. However, we were unable to obtain estimates from every board. Although it is not clear whether all boards used the same assumptions, their estimates were generally higher than those that we received from the Health Department. I have included the estimates in my report. That was particularly true of the new general medical services contract.
There is a significant risk in financial planning in the NHS in Scotland if health boards and the department calculate cost pressures differently. I therefore wrote to the acting head of the Health Department to ask for an explanation of the differences.
A third factor relates to pension costs in the health service. As of 1 April 2000, the employer contribution to the NHS pension scheme increased from 5.5 to 14 per cent. The increase was needed to address a shortfall of some £934 million as against known liabilities. The additional cost to NHS bodies of the increase in the employer contribution is at least £226 million. The Health Department will meet the cost as part of the general uplift in funding. However, the requirement is another source of financial pressure on NHS resources as a whole over future years.
We are happy to answer any questions that the committee may have.
Thank you. As the committee knows, we are scheduled to receive a further briefing on the report on 11 January. More significant questions can be put to the Auditor General at that time. Indeed, we are scheduled to take evidence from the Health Department's accountable officer on 25 January.
Although our agenda today is busy, we felt that, given the publication of the report this week, it was important that the Auditor General should be allowed time to report on the document today. We thought that it would also be helpful in the context of our agenda item today on the audit of the Argyll and Clyde NHS Board accounts. Members can put questions on the report today, but they should bear in mind that full answers may not be forthcoming. We will go into more depth on the report on 11 January.
I have a question on the use of ring-fenced moneys. If a ring-fenced allocation is made, are terms and conditions associated with the spending of that money?
The short answer is that if money is allocated for a specific purpose, a memorandum is sent by the department in which it intimates the resource allocation and the purpose for which it is to be used. We have commented elsewhere in the report on the matter by saying that the accounts that are subject to audit do not make transparent those additional allocations. However, there will be documentary evidence that the allocation is for a particular purpose.
Does the department follow through on the memoranda that it sends out? Does it sign off the fact that the money has been spent on the purpose for which it was intended?
I am sorry, but we cannot give you a definitive answer to that question. I suggest that the information should be sought from the department.
I welcome the change to the format of the report, which is explained in paragraph 14. I found the new format helpful and wanted to say so by way of feedback.
Although I have identified a number of points and queries, as the convener said, I do not expect to get answers today. However, I will put those points on the record and flag them up as areas for further examination in our sessions in the new year. I am sure that the Auditor General can respond directly to some of the issues that I raise, and I hope that that might be the case with my first question.
Exhibit 7 on page 24 indicates that the estimates are "revised" Health Department estimates for the costs of pay modernisation. Can the Auditor General tell the committee how those estimates contrast with the previous ones?
Exhibit 7 contains the Health Department's revised estimates for the single year 2004-05. In the report that I published in the summer, we estimated future cost pressures on a cumulative basis through 2005-06. The short answer to Susan Deacon's question is that exhibit 7 shows that the cost of the consultant contract that has been given for the year 2004-05 is the same as that in my earlier report. The figure for agenda for change, which is £130 million to £160 million, is new because the negotiations have been concluded since the previous report. The figure for the cost of the GMS contract for 2004-05, including out-of-hours work, is £82 million, which has risen by £29 million since the previous report was given to the committee. That is how we get the total cost of between £234 million and £264 million.
I am grateful for that clarification. The Health Department's estimate of the cost of implementing the new GMS contract, which has risen by £29 million, is the main area of disagreement with the service because the service says that the cost will be greater. Given that, can you tell us what the higher figure is? What is the service's estimate of the cost of implementing the contract?
The short answer is that I am unable to give the committee that information. There seems to be agreement between health boards and the department on the cost of the consultant contract. The figure for the cost of agenda for change is entirely new and it is presented as a range, or as the department's best estimate of the cost. Susan Deacon is correct that we have evidence that the boards' estimates of the costs of the GMS contract seem to be higher than the department's estimates are, which is why I have written to the department to ask it to help to clarify the extent of the difference and the reasons for it. The problem was that information from some boards indicated that the costs might be relatively high, but we did not have a return from all the boards and we could not be wholly satisfied that the terms in which the numbers were calculated were similar in all boards. More work will need to be done on those matters, but there is clearly a risk that the cost of the GMS contract may be higher than the figure that the department has provided.
Paragraph 74 of the report stresses the need to ensure that
"current financial management arrangements are sound"
and that the Health Department and NHS bodies
"have sufficiently skilled staff and appropriate systems in place to enable them to meet future challenges."
I am sure that we will want to explore that wide issue when we have the chance in the new year. However, for now, given the concerns that the committee has expressed about the reliability of performance data that the Health Department produces, will the Auditor General say whether we should have similar concerns about the financial data that the department produces?
In the same part of the report, the Auditor General talks about the impact of late allocations of money to the service. Can he make available additional detail on that in advance of our sessions in the new year to inform our examination of that specific point?
Paragraph 19 of the report explains the balance of health service spending in Scotland. It states that, of the £7.5 billion that was spent in 2003-04, £7 billion was allocated to the service and £0.5 billion was used by the Health Department. Can the Auditor General provide us with additional information on how the £0.5 billion is utilised by the Health Department? I appreciate that other sources for that information are available. Has the Auditor General considered how decisions are taken about the use of that centrally managed expenditure?
In response to your first question about the quality of financial data and whether the committee could receive an assurance about the financial reporting, I can provide that assurance. This year, there were no qualifications on the accounts of any NHS body in Scotland. In general, the health service is good at coming close to or hitting the revenue resource limit and its other targets every year and the position with what might be called in-year financial management and control and financial reporting is sound.
I am concerned more about the forward financial management of the health service and the extent to which NHS boards rely on one-off funding to balance the books. The problem is that such a reliance might not address the underlying cost pressures that continue while new financial burdens are imposed.
As far as late and in-year changes are concerned, I draw the committee's attention to paragraphs 44 and 45 on page 11 of the report, where we have itemised the number of changes that some health boards have had to cope with. In the case of Tayside, which is one of the more extreme examples, there were some 100 changes to the revenue resource limit during 2003-04. Such a situation must make financial management that bit more difficult, not least because some of the changes are notified after the financial year has ended.
It is absolutely appropriate to acknowledge that changes will be made during the financial year as resources become available and special needs arise. For example, health boards can be under a lot of pressure during the winter. Nevertheless, such significant changes to the financial target of the revenue resource limit over a financial year—and indeed after the end of a financial year—somewhat obscure and devalue it. I should also record that the Health Department recognises that there is an issue to address and is committed to reducing the number of such changes that it pushes through.
On the question about the £0.5 billion balance of funding, if the committee agrees, I will consider the matter and provide an answer at a future meeting.
I am sure that that would be acceptable.
I thank Audit Scotland for the report's clarity. The Auditor General said that the problem does not really lie with the reporting mechanism. However, I wonder whether it is a budgeting problem. Even at first glance, the situation is quite alarming. Sound finance is crucial to good service planning, but the overview highlights an air of unrealism within boards and in the department. After all, when is a balanced budget not a balanced budget? I suggest that that is when it uses ring-fenced, non-recurring expenditure; when it does not achieve savings; and when it does not make adequate resources available to tackle cost pressures. I find it alarming that the department and the health boards differ over the estimates of costs. If the reporting is good, which is an essential element, are we looking at problems of budgeting and allocation?
It would be reasonable to say that the department and the health boards converge on the estimate of future cost pressures. However, there is still some way to go, not least with regard to the GMS contract.
The somewhat challenging savings plans that health boards are having to introduce to meet future financial targets must also be a matter of concern. Pages 22 and 23 of the report set out three case studies of the current savings plans for Argyll and Clyde, Lothian and Greater Glasgow. Committee members will see that, in each case, it will be quite a challenge to achieve those savings and that a number of health boards face some real risks with financial and resource management. That applies not just to the three, quite large boards that we picked out as examples but more generally in the health service.
It bothers me that budget manipulations and strategies that appear to achieve an annual balance can hide or appear to overcome fundamental problems that are accumulating. We must address that.
I think that that was a statement, rather than a question, which is fine.
Will the Auditor General comment on the emerging trends in the boards that seem to be most under pressure? We are trying to drill down to ascertain whether the root cause is bad management or structural underfunding in relation to the money that the Scottish Executive makes available to boards. Is a pattern starting to emerge in which certain boards struggle to meet pay modernisation costs and to address the other factors that are driving increased costs in the health service in Scotland?
The financial recovery plans of six boards are based on savings to their cost base. In three cases—Argyll and Clyde, Greater Glasgow and Lanarkshire—the savings are substantial. The other boards that have put in place savings plans are Borders, Forth Valley and Orkney. The extent of the pressure varies, but each of those boards has put savings plans in place. In a number of cases, the plans will be challenging, as I think that the boards' managers themselves recognise.
Are there common denominators that indicate why the emerging cost pressures are so acute in those boards, especially in the three boards that you mentioned first—apart from the fact that they are all in or near Glasgow?
On the basis of our analysis, it is not possible to pull out generalities. Members of the committee will be aware that every board faces similar pressures, but there might well be local factors that circumscribe the amount of savings that boards must seek.
If there are no further questions for the Auditor General, I thank him for answering those points. The scope of the questions indicates that that was a useful agenda item and the committee will return to the matter on 11 January. Before we move on, I welcome Duncan McNeil, whose constituency is in Argyll and Clyde NHS Board's area. He was courteous enough to let the committee know that he wanted to attend today's meeting.