Audit Committee, 29 Oct 2008

Meeting date: Wednesday, October 29, 2008

Official Report 170KB pdf

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Section 22 Report

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“The 2007/08 Audit of Western Isles Health Board”

Item 3 is a briefing from the Auditor General on "The 2007/08 Audit of Western Isles Health Board".

As the committee will recall, there are three financial targets for NHS bodies, one of which is that they must not exceed their revenue resource limit—the amount of money that is allocated to an NHS board for spending on its day-to-day operations during the financial year. The auditors have reported that only one board—NHS Western Isles—failed to meet that target in 2007-08. The auditor's report on NHS Western Isles highlights that failure, although the opinion is not qualified. The board exceeded its revenue resource limit by just over £3 million. However, for the first time in five years it achieved an in-year surplus—of £267,000—which reduced the cumulative deficit compared with 2006-07.

In the annual audit report submitted to me, the auditor notes that steps to address the board's future financial stability, including a financial recovery plan, are now under way. The Scottish Government proposes to provide brokerage—extra funding on loan terms—during the current year to cover the cumulative deficit, provided that progress on the recovery plan is sustained. The board currently forecasts that it will break even, although the auditor's view is that that will present a significant challenge to NHS Western Isles.

This is the fourth year in which I have prepared a section 22 report on the accounts of Western Isles NHS Board. The committee conducted an inquiry into the issues arising from the report that I prepared last year and reported on its findings in May. The report that I am presenting today gives an update on the progress that has been made since my previous report was issued.

In June, the board responded to the committee's report and accepted all the recommendations for improvement. As I mention in my latest report, the auditor has criticised the corporate governance arrangements in the past, and the committee has also expressed serious concern about them. The auditor still has some concerns in this area but, as I outline in my report, there is some evidence of progress since 2007-08. The former acting chief executive has moved elsewhere in the NHS and an interim chief executive has been appointed until the board finds a permanent replacement.

That is a brief update on how we see it from the audit perspective. I am happy to answer any questions that you might have.

Thank you. We are all relieved that the board has achieved an in-year surplus. We have previously recognised the efforts of the staff who have been put in place to enable that to be achieved.

The continuing concern is primarily about the cumulative deficit, which is still a drag. You will recall that, at a previous meeting, George Foulkes raised the possibility of the debt being written off. However, there is a dilemma. If we allow public organisations to run into deficit and then say that we will write it off, there is no encouragement for them to live within their means, so there are dangers associated with writing off the debt. Nevertheless, as I recall, Argyll and Clyde NHS Board's accumulated deficit was written off as part of the price of structural change. I might be wrong about that—if so, you can clarify the position.

Would it help Western Isles NHS Board to manage its functions from now on if, as a price of structural or other change, the accumulated deficit was written off?

I am sorry to be less than fully helpful, but the question is probably better addressed to the health directorates. The board is making progress in year to get into balance. That is reflected in the fact that it had a small surplus in year. It is receiving brokerage funding to help it through the period of transition. It would be challenging but nevertheless entirely possible for the board to bring itself into balance year by year.

As the committee is well aware from the evidence that it has taken, there are some fundamental issues within Western Isles NHS Board about the range of services that it is appropriate for an island board to deliver at its own hand, and there have been concerns about the sustainability of its clinical strategy. It is difficult for me to answer a question about the financial treatment of the cumulative deficit in isolation from policy matters regarding the clinical strategy that is appropriate for an island health board.

I accept that, but your evidence is that the board is beginning to manage its resources efficiently and you seem confident that the in-year surplus that has been achieved can also be achieved in future years.

I am sorry, convener, but I cannot go that far. The financial pressures on the board are still challenging. It has expressed its commitment and firm intent to achieve balance in the current financial year. I am not in a position to give any numbers regarding that, but we know that the board faces a considerable challenge.

There is a somewhat separate issue, which I attempted to mention a moment ago, about the level of NHS services that the board can sustain in the longer term if it is to ensure that clinical quality standards, for example, are safeguarded and enhanced.

The management changes are outwith your control and that of the board. From an audit perspective, are you concerned that the repeated changes at senior level will impact on the board's ability to manage its resources?

In past reports, auditors have commented on the intrinsic risk of the high turnover in senior management positions. There is no doubt that, if the situation is now more stable, that will help the board enormously in managing the risks that still exist.

As the convener said, I suggested that we should recommend that the debt be at least partly written off. At the current rate, the board will take about 10 to 12 years of struggling each year to raise about £250,000 to pay off the debt.

The basis for my suggestion that some of the debt should be written off was that the Scottish Government's home and health department—what do we call it? You know what I mean—had some responsibility. In his latest letter, which is dated 28 October—the convener referred to it—Dr Woods at last sort of makes an admission. He says:

"I agree that with the benefit of hindsight in relation to subsequent events the Government might have deployed the interim senior management team sooner than September 2006."

Damn right the Government should have done that, but it did not, so it has some responsibility—it should have acted earlier. If it had done so, the deficit might not be as large. Can we tell the Scottish Government's health directorates that they should deal with Western Isles NHS Board's debt more sympathetically?

We have already decided not to make that recommendation.

Circumstances change. I keep trying.

We can discuss the suggestion when we reflect on the report later.

Am I correct to say that the board exceeded its revenue resource limit by £3.097 million in 2007-08?

Yes.

In effect, is that a balance sheet figure? I suppose that my point relates to the suggestion that George Foulkes—understandably—makes. The figure is included in the report as the amount by which the revenue resource limit was exceeded. I assume that the health board is under a legal or audit requirement to be in balance each year within the year. I am trying to understand the impact in law or in audit terms on the health board's budgeting. Are you saying that, every year, the health board must budget to break even, so it must budget for an in-year underspend to balance the significant deficit that it is carrying forward? What are the legal, policy, accounting or audit requirements on the board? That is what I am driving at.

The target is not to exceed the revenue resource limit, which is the annual allocation to keep the health board going and to pay for services. That is a Government requirement that is imposed on the health board.

I want to understand whether that is an example of the Government mixing balance sheet and revenue items—

Not really—not in this case. I ask Nick Hex to help us.

It might be easier to explain all the overspend above the revenue resource limit as a cumulative deficit that has built up through the board's series of in-year deficits in the past four or five years. We can see that the cumulative deficit has reduced because of the board's in-year surplus in 2007-08. Despite that surplus, the board still carries forward a deficit that appears as the overspend against the revenue resource limit. The situation is slightly complicated but, as the Auditor General said, the board is set the revenue resource limit as a target each year. The idea with brokerage is that the board would essentially get a loan from the Government to pay off the debt. It would then gradually pay back the loan in a series of staged payments over future years.

That has not yet been sorted or fixed.

No.

Therefore, is the current requirement on the health board to make cuts to health board expenditure of £3.097 million—it was £3.364 million last year—so that, technically, it is in balance in year?

As we have seen this year, the in-year surplus does not necessarily fully address the revenue resource limit overspend, in that there is a cumulative deficit. The target for the board is still to meet the revenue resource limit.

So, unless the health directorates change the targets, the current policy requirement on the health board is to be within its revenue resource limit and at break-even by the end of March 2009, which would require an in-year cut in expenditure of £3.097 million.

For the board to meet its revenue resource limit, it would imply that it would have to write off that amount.

The question that Nicol Stephen is driving at is this: over what period does the £3 million deficit need to be reduced? Is it by the end of the next financial year, or can the deficit run indefinitely with the board making a contribution each year?

That is a matter for the health directorates and the health board to reach an understanding on. The revenue resource limit is calculated against the objective assessment of what it should cost the health board to run the services from one year to another, and all health boards have to observe that resource limit. If a board breached it in any significant way or if more than one board breached it, it would be a problem for the management of the aggregate finances for the NHS as a whole. That is why it is important that boards come within the revenue resource limit in each year.

In theory, the health directorates could require a health board to come back into balance in a single year but, if the excess had built up over a number of years, it would not be realistic or reasonable to expect a health board to come back into balance in one year without threatening the on-going services that it provided. The judgment on how long it should take for the health board to get back into balance would be taken by the health directorates with the health board.

As I understand it, the default position is that health boards should be within their revenue resource limit each year.

That is an absolute and fundamental requirement in all health boards. It is because that has been breached year on year that I have prepared a series of reports to Parliament.

And you have had to draw attention to that in the audit.

Indeed.

I would have thought that the alternative to the default position would be an agreement or understanding between the health directorates and the individual health board to vary the position. However, we are not currently aware of any such agreement with NHS Western Isles. The normal assumption in those circumstances is that the default position applies, but there is no clarity on that.

We are in a vacuum. We are unaware of any agreement between NHS Western Isles and the health directorates to sort out the problem in three, five or 10 years or any other time. There is no clarity or agreement as far as we can see. Is that a fair summary?

Our understanding is that a financial recovery plan has been agreed between the health board and the health directorates, but we cannot advise the committee about the treatment of the accumulated deficit in it. The committee would have to put that question to the health directorates.

I offer one other thought as context. As a great economist once said, there is no such thing as a free lunch. Having a deficit is a serious problem; if a board persistently runs a deficit, the only way of plugging the gap is to take resources from elsewhere in the health service. That is one of the reasons why it is absolutely right for each and every health board to be rigorous and disciplined in observing the revenue resource limit. If that does not happen, the whole NHS budget risks running out of control and out of balance.

I do not particularly want to labour this point, but I am a little bit surprised that you do not have access to that information.

We would have access to that information. However, we are not able to comment on the real-time financial position of the health board. The committee well knows that, in previous years, there was a lack of confidence and reliability in some of the financial numbers that were reported, so I am not really in a position to give you a robust answer to the question of what the future of the health board will look like.

The watchword must be caution. I am tempted to say that we are far from being out of the woods.

Attitude, organisation and personnel must be the keys to future progress. That has always been straightforward. We should give NHS Western Isles credit for its progress in strengthening the organisation of its finances and wish it well in its task.

The question, though, is whether the recovery is short term or long term and whether it is robust enough to stand up to whatever the future will bring. How close is the present situation to being sustainable? I am worried about the fragility of the recovery and concerned that the acting chief executive, who deserves every credit for his work, has now gone. It is crucial that that work is maintained and, indeed, increased.

It is now a matter of monitoring the situation and, if required, providing assistance. NHS Western Isles has made great steps forward, but I urge caution. After all, we must ensure that these improvements are robust.

I very much agree with Mr Welsh's comments. It is perhaps time to step back a little and monitor developments in the usual way through the audit process.

Although I am happy to congratulate the health board, I wonder whether the movement from last year's in-year deficit to this year's in-year surplus has had any impact on clinical standards, service delivery or the level of health care. Surely that must be the most important issue for the Western Isles.

Although the issue of clinical standards is clearly important, it is not up to the audit process to monitor it. In the report that it produced in the spring on clinical governance and risk management, NHS Quality Improvement Scotland, which is the body that oversees boards' management of clinical standards, recognised that recent problems had made it difficult for the board to move forward with its clinical governance and risk management agenda. However, NHS QIS is monitoring the situation.

As there are no other questions, I thank the Auditor General for his briefing.

We now move into private for item 4.

Meeting continued in private until 11:17.