Audit Commission

An Audit Commission report to the Secretary of State for Health, the Rt Hon Patricia Hewitt MP, recommends major changes in the National Health Service (NHS) financial management and accounting regime to help improve the financial performance of the NHS and lessen financial risks for individual bodies.

Published today (26 July), the Review of the NHS Financial Management and Accounting Regime says that the current system has weaknesses and needs to adapt to the new demands placed on it by the Department of Health’s reform programme. Recommendations in the review, which is based upon a substantial body of previous Commission work and wide consultation, are designed to address these issues.

The review’s recommendations aim to support the government’s major health reforms and put trusts and primary care trusts (PCTs) and the NHS overall in a position to operate on a sound and sustainable financial footing in the future. Key recommendations include:

• the principles of Resource Accounting and Budgeting (RAB*) should no longer be applied to NHS trusts, and that NHS trusts should move onto a regime which offers sharper, more appropriate incentives for good financial performance
• changes to PCT planning and financing arrangements which would put them in a stronger position to manage their financial risks;
• specific improvements to the Department of Health’s (DH) and strategic health authorities’ (SHAs) oversight and management of the service, covering the costing of policy initiatives, the way the Payment by Results tariff is developed and given greater certainty over the medium term, and the accuracy and availability of data;
• key elements of a more effective and swifter mechanism for identifying and dealing with financial distress at NHS bodies. In addition, financial support for organisations should be provided in the form of working capital and that the DH should establish a banking arrangement to do this; and
• the specific steps to be taken to improve the skills of finance staff and the capacity of boards.

Sir Michael Lyons, Acting Chairman of the Audit Commission, said:
'The NHS is a unique and complex organisation and its economy is equally complex. Our proposals are challenging and wide-ranging, and they may take time to implement. But, the financial management and accounting regime of the NHS needs to change to keep pace with the many significant new health reforms that are designed to further improve the NHS. Crucially, our recommendations support the NHS reforms, would enable trusts and PCTs to achieve better value for taxpayers' money and contribute to consistent, reliably funded services for patients.'

The Commission believes its recommendations would ensure that the DH meets its commitments to HM Treasury and the taxpayer while enabling trusts to operate in a more businesslike way. Other outcomes would be to:

• bring greater clarity to the financing system both for individual organisations and for the NHS as a whole;
• improve further the professionalism of NHS finance staff; and
• increase the capacity and capability of individual bodies to manage their affairs and at the same time increase their accountability for doing so.

To read in full the Audit Commission's Review of the NHS Financial Management and Accounting Regime, please visit www.audit-commission.gov.uk/health

Notes to editors

1. * RAB is the financial management framework in place across central government. The Department of Heath applies the principles of RAB to the NHS, including to NHS trusts. If a trust reports a deficit in one year, its income is reduced by that amount the following year. In addition to affecting the following year’s income, the trust’s in-year deficit is posted to the balance sheet and carried forward to future years to give a cumulative position. This cumulative position is used to assess whether the NHS trust has achieved its statutory duty to ‘break even taking one year with another’. The combination of a carried forward cumulative deficit and a reduction in income the following year is often known as a double deficit. (More detail is available in the review.)
2. The Audit Commission is an independent body responsible for ensuring that public money is spent economically, efficiently and effectively, to achieve high quality local services for the public. Our remit covers around 11,000 bodies in England, which between them spend more than £180 billion of public money each year. Our work covers local government, health, housing, community safety and fire and rescue services.
3. As an independent watchdog, we provide important information on the quality of public services. As a driving force for improvement in those services, we provide practical recommendations and spread best practice. As an independent auditor, we ensure that public services are good value for money and that public money is properly spent.
4. For further information about the Audit Commission, visit our website at www.audit-commission.gov.uk